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Acquisition in the Subscription Business: How to Get & Give the Most Value

  • Christopher George - SUBTA Chairman & Co-Founder
  • Aug 3, 2021
  • 5 minute read

Business acquisitions and sales are risky investments that require serious contemplation. If you’ve decided to acquire a new subscription business or sell your own, you should first consider the business’s customer base, growth potential, and the overall financial value it brings to the table.

After a casual conversation in 2019, for example, CigarClub CEO Jeff Zeiders saw value in our company, Gentleman’s Box. Due to the exposure Gentleman’s Box had received from SUBTA’s reach and the fact that both businesses targeted a similar demographic, the successful cigar subscription box acquired Gentleman’s Box in 2020.

Read on to learn more about the business acquisition process and when you should consider either selling or acquiring a subscription-based business. 

Business Acquisition 101: A Crash Course

In a business acquisition, one company will buy all or most of another business in which they see value. Value can come in the form of an existing subscriber base, reduced operating costs, or fewer business expenses.

Every business acquisition will look different, but essentially, based on the above factors and the annual recurring revenue (ARR) of the business being acquired, both companies will negotiate the value of said business. 

From the acquisition cost, we can determine the multiplier — that is, the quotient of the business’s acquisition cost and its revenue. For example, if a company with a revenue of $500,000 is acquired for $1.5 million, the business is seeing a multiplier of three times its annual revenue. 

An ARR of less than $10 million is typically based on the business’s earnings before income, taxes, and amortization (EBITA), whereas an ARR exceeding $10 million might see a multiplier of as many as four or five times, instead. And in some cases we have seen a multiplier of revenue not just EBITA

While preparing for the acquisition, the business must have a solid plan for data integration. According to Database Trends and Applications Magazine, an acquisition is just as much an IT undertaking as it is a business process, and requires close cooperation between business and IT departments. 

Acquisition also requires structured processes for obtaining legal counsel and monitoring the transfer internally. 

When to Sell Your Subscription Business 

There’s no exact number to tell you whether your business is ready to sell, but there are some guidelines to keep in mind if you’re on the fence. 

It’s not a good time to sell if:

  • You don’t have something else in place first. What are you going to do after you sell? If you don’t have something lined up to take the place of what you’re selling, you’ll end up burning money.
  • Selling would keep you at the same salary as before. You want to gain something from being acquired. If you won’t gain anything, why sell in the first place? 

On the other hand, it might be a good time to sell if:

  • You’re burnt out. As an entrepreneur, sometimes you build a business for five or six years, and then you’re just done with it. Your mental health is important, so if you’re mentally checked out, it might be time to sell.
  • You have a healthy, profitable business and are ready to move on to something else. The health of the business must be your first priority. A lot of people like to think they’ll sell just on revenue, but the business isn’t necessarily profitable. Build a healthy, profitable business first, and then try to sell.

Above all, make building the business itself your top priority, and don’t try to sell if you aren’t prepared for what comes next.

When to Acquire Another Subscription Business

The best reason to acquire another business is to expand your subscriber base. If you’ve got a business that’s stagnating at 50,000 subscribers, the easiest way to double that is to buy another business that has its own 50,000 subscribers.

It’s also a good idea to consider acquiring another business if you can identify synergies between your own company and the one you’re interested in acquiring. 

When acquiring another business, you start to see opportunities for economies of scale, which will have an immediate positive effect on your bottom line. For example, once the businesses merge, you will likely only need one office instead of two. Also, you can consolidate your marketing departments that can manage ads and social for both companies. In this way, mergers and acquisitions present massive opportunities for cost savings. 

On the flip side, it’s probably not a good idea if you don’t have the ability to scale with another company coming in. If you’re already struggling to build your own brand playbook, and your back is against the wall monthly, you don’t want to add a whole other business on top of that.

Make sure you have a good handle on your own business and branding before you even consider acquiring another.

The Future of Subscription Business Acquisition

With the Covid-19 economy, subscriptions are taking up all parts of our lives. Today’s consumer is all about usership over ownership. They want to use what they want, when they want it. And they want to own fewer items, services, and programs than previous generations.

Big brands are taking note of this shift. Companies looking to acquire subscription services aren’t just looking at what the business has been able to do transactionally, but also the overall value it can bring them: A business with only 10,000 subscribers but high community engagement can be super valuable to a billion-dollar company.

And because so many big brands are pivoting to the subscription model, it makes sense that smaller, already-established subscription businesses are prime candidates for acquisition. Beyond eliminating the competition, many big brands recognize that subscription commerce is a totally different ballgame than typical e-commerce.

With subscription services as the future of customer buying behavior, we’re going to see a lot more businesses pivoting to the subscription model — and that means a lot more acquisitions, too. By understanding the acquisition process and knowing the value of your subscription business, you can position yourself for continued success.

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