How to Value and Sell a Subscription Business
Technology advances and changes in customer preferences are increasing the value of subscription businesses. Tech innovations make it easier to shop and pay for purchases electronically, and consumers are shifting toward subscription businesses for many purchases. Consider these points:
Payvoice states that, in recent years, “Subscription businesses grew revenues about five times faster than S&P 500 company revenues and U.S. retail sales.”
In the same Payvoice article, Gartner reports that 75% of customers selling direct to consumers will offer subscription services by 2023.
Shopify explains that the subscription ecommerce market is projected to reach $473 billion by 2025.
Many Software as a Service (SaaS) companies operate using a subscription model, allowing customers to get immediate access to software updates. As your subscription business grows, you have more opportunities to upsell or cross-sell products to existing customers.
Shopify also reviews three popular subscription business models:
Subscription boxes: This approach seeks to create a highly personalized experience for the customer. Blue Apron and Green Chef use this approach to send unique meals and recipe instructions to their customers.
Replenishment model: Many consumers buy convenience items, such as razors and vitamins, through subscription businesses. Harry’s and Dollar Shave Club are competitors in the razor business.
Access business model: These customers pay a fee to obtain lower prices, or members-only perks. JustFab uses this model in the clothing market, and customers are attracted to the exclusivity of the business.
If you’re mulling over a sale and thinking about how to value a subscription business, speak with an experienced business broker. Meet with a broker to discuss the factors that make your company valuable, and how your firm creates value for the buyer. The broker may uncover factors that you haven’t considered.
Key Valuation Metrics
Here are some factors that make your subscription business attractive to potential buyers. Ask a broker to help you assess each of these metrics, and how you can make improvements in the business.
Keeping Subscribers Engaged
Once you convert a prospect to a customer, you need to keep them engaged. Successful companies offer promotions and reward programs to subscribers. These firms also provide useful blogs and video content to educate customers and solve their problems. Posting content on social media can help you stay in front of your customers, so they are more likely to remain subscribers.
Provide Great Customer Service
Technology improvements also mean that customers have higher expectations when they buy a product or service. You need a website that is easy to navigate, and a smooth process for online checkout. Companies that offer live technical support can resolve customer issues much faster, and maintain client satisfaction.
Driving Monthly Recurring Revenue
Buyers are attracted to the amount of monthly recurring revenue (MRR) that a business generates from subscriptions. Companies that generate increasing MRR provide a product that is attracting more subscribers over time. MRR also adds a degree of certainty to monthly revenue projections.
Forecasting Customer Lifetime Value
Have you used the same auto repair shop for years? Many people do, because they value a repair shop that does quality work at a fair price.
In a similar way, consumers stick with products that solve a customer problem. Mailchimp, for example, has provided email-marketing services for years, and many users continue to pay monthly fees for their product.
Qualtrics defines customer lifetime value (CLV) as “a measurement of how valuable a customer is to your company with an unlimited time span as opposed to just the first purchase.” The longer you can retain a client, the higher CLV you generate, and that figure increases company value.
Balancing Customer Acquisition Costs and Churn Rate
Generating revenue comes with a cost, and customer acquisition cost (CAC) is the cost incurred to acquire a new customer. A high cost to acquire a customer can be justified, if you can retain the business for years.
You need to compare the CAC with the churn rate, which is the percentage of customers who continue their subscriptions in a specific period. A low CAC with a low churn rate is ideal, and these factors boost the value of your business.
Potential buyers also want a business that can transition with a minimum level of disruption.
A broker will create marketing materials that explain the value proposition of your business, and the broker can find qualified buyers for your firm. Once a buyer is identified, the broker will use these valuation methods to negotiate the sale price.
Reviewing Valuation Methods
The two most common valuation metrics are earnings before interest, taxes, depreciation, and amortization (EBITDA), and seller’s discretionary earnings (SDE). Your company’s sale may be based on a multiple of these balances.
Using EBITDA for a Valuation
The earnings before interest, taxes, depreciation, and amortization (EBITDA) formula is a commonly used metric to value businesses. As the name implies, this method adds back some expenses to the earnings total. Firms with a consistent history of profits may sell for a higher EBITDA multiple.
Applying SDE to the Valuation
The seller’s discretionary earnings (SDE) balance assesses company value based on the earnings that an owner generates from the business. Here’s the formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses) = SDE
SDE adds back business expenses that have some personal benefit to the owner. In addition to vehicles and company travel, you may add back charitable donations and your company salary. The goal is to calculate the total financial benefit earned by the owner.
You’re busy managing the business, and you can benefit from handing off the details of a sale transaction to a business broker.
Work With an Expert
Raincatcher’s experienced brokers have worked on thousands of business sales in a number of industries. They can help you increase the value of your subscription business, find qualified buyers, and negotiate an attractive sale price. Curious what your business may be worth? Get started with a free evaluation of your subscription service now.
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