Neil Patel

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M&A in the subscription vertical involves unique challenges and opportunities suitable for its unique business model. Subscription-based companies have demonstrated an astonishing 100% growth in the last few years thanks to their recurring revenues.

Statistics indicate that the worldwide subscription segment will likely touch the $2T mark by 2025. The rising popularity of eCommerce and online shopping trends is contributing to the growth in a big way. Businesses are quickly recognizing the advantages of implementing subscription services.

Whether in digital or physical products and services, companies are adopting this highly successful business model. Regardless of the scale, starting from new ventures to mid-sized and Fortune 500 enterprises, subscription-based concepts are grabbing interest.

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The Ultimate Guide To Pitch Decks

Understanding Subscription-Driven Businesses

Essentially, a recurring revenue model, a subscription-driven business, has customers consistently paying for products and services at fixed intervals. The payment cycle can be weekly, monthly, or per year, with companies offering discounted deals and offers to returning customers.

Customers have the option to review and renew their subscriptions at the end of the cycle. This model is beneficial for customers since it ensures an uninterrupted supply of the products and services they need regularly. They need not place fresh orders and make payments each time.

Companies can lower customer acquisition, marketing, and advertising costs while ensuring recurring revenues. Customer retention rates are higher because high-grade products and top-notch services will have them coming back for more. Lower churn rates ultimately lead to higher profits.

The possibility of easy replenishment with doorstep delivery for physical goods and customization for digital products have transformed this segment. Convenient payment systems have also contributed to the success of eCommerce and subscription-driven brands.

Statistics indicate that in 2022, 89% of payments were made using digital platforms, and in 2023, the digital market is an estimated $6.03T.

Several Top Brands Have Adopted this Model

The pandemic and stay-at-home orders promoted the subscription-based model in a big way. And customers continue to rely on its convenience even after the lockdowns have been lifted.

Several top brands have adopted this business solution and engaged in M&A in the subscription vertical for growth.

Some of the best-known examples of companies running successful subscription-based operations include Blue Apron meal kits, Dollar Shave Club, and Stitch Fix personal styling. The target customer base is Gen Z or typically young, affluent urbanites. However, millennials are also jumping in.

Shoppers now recognize the advantages of a convenient, customized, and cost-efficient way to source their regular needs. On the downside, companies that are unable to maintain standards and fall short of quality can quickly have their subscriptions canceled.

Competition is tough, and clients will move to competing brands with the click of a few buttons. The eCommerce and subscription-based market includes a wide array of product categories, with brands attracting heavy investment from venture capitalists.

For starters, consider baby and childcare products, cosmetics and skincare, meal kits, and feminine hygiene products. Additional categories are beer and vintage wine, contact lenses, meal prep kits, pet food, and vitamins. Apparel, including innerwear and outwear, are also big business.

Among the digital products, you can count video games, Amazon Prime, Netflix, Spotify, audiobooks, and net magazines, among others. The rapid growth in the sector has spurred M&A in the subscription vertical.

Some of the deals that have generated hype include the acquisition deal between Unilever and Dollar Shave Club for $1B. Another example is the grocery chain Albertsons, which acquired Plated, the meal kit company, for $200M.

Fingerprint’s acquisition of Scribble Press, a kids’ multimedia platform, is another deal that made waves in the subscription-driven industry.

Factors Influencing M&A in the Subscription Vertical

Several factors influence how mergers and acquisitions in the subscription-based vertical proceed. Here’s a quick look at them:

Evaluating the Targeted Customer Base

One of the most crucial aspects of a business is its customer base. Potential acquirers want to be sure that the company has a dedicated customer profile that is interested in its products. They can get this assurance when evaluating a subscription-driven company.

Customers who don’t have the time to place orders for essentials regularly simply opt to sign up for a subscription. This service ensures timely delivery even if they forget to purchase again.

Many brands also offer customers the opportunity to try new products as part of the packages they provide.

A great example is SnackCrate, which allows foodies to explore new tastes and flavors from global kitchens and cultures. They can always choose to purchase their favorite snacks again. Other brands offering monthly subscription boxes include CrateJoy, LootCrate, Stitch Fix, and Sephora.

Streaming services like Hulu, Amazon Prime Video, Apple TV, and Disney+ are other examples that cater to recurring viewers. Customers can pick the new media they want to watch.

Not only does the company save on marketing and advertising costs, but it also keeps its CAC or Customer Acquisition Costs and churn rates low. Satisfied customers are more likely to recommend the brand to friends and family, ensuring a consistently growing clientele.

The most significant benefit for customers is that they can place orders for products customized to match their needs. For instance, meal prep delivery services provide dishes for vegetarians, athletes, weight-watchers, diabetics, and heart disease patients. Each kit has the right blend of nutritious ingredients.

Building long-term relationships and robust customer engagement are added pros that acquirers appreciate. That makes the brand a great candidate for M&A in the subscription vertical. Buyers can also consider these companies as options for horizontal mergers and conglomerates.

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Consistency in Revenues and Earnings

A steady revenue stream is another of the top priorities for acquirers. And subscription-driven brands ensure recurring revenue sources with the possibility to predict profitability metrics accurately.

Since the company has a fair overview of the incoming cash flow, it can work out its budgeting for growth. Or expansion and any other operations necessary to add value. The management can better devise practical strategies because they can count on the company’s available resources.

Metrics in the Financial Projections

Businesses scouting around for buyers can present metrics like Monthly Recurring Revenue (MRR) and Annual Recurring Revenues (ARR). Metrics like these in the financial projections raise the estimated valuation so the company sells for a higher price.

Other metrics that acquirers focus on during the due diligence include the customer lifetime value (CLV) and Churn rates. Customer acquisition cost (CAC), average revenue per user (ARPU), profit margins, and gross margins are accurate figures sellers can present.

Conducting a thorough market analysis by studying the competition, macroeconomic factors, and inventory cost enables estimating potential risks moving forward.

Assessing this data allows M&A advisors to get a precise overview of the company’s financial health and future prospects. Putting a fair price tag on the business makes it much easier to achieve a smooth M&A in the subscription vertical.

Intellectual Property and Intangible Assets

As with most other verticals in today’s economic structure, Intellectual Property (IP) is a crucial asset. These assets allow companies to provide top-notch products and services to their clients.

The target company’s content library and ongoing promotional campaigns are value-adding assets that raise its pricing.

Subscription-driven companies offering digital services, particularly, own an extensive portfolio of IPs. This can include SaaS or Software-as-a-Service, software, media, games, movies, and serials.

Other than products the company licenses, it owns other software assets to provide services.

Payment platforms for collecting cash digitally, maintaining subscriptions, and customers’ and vendors’ Personally Identifable Information are other secure assets. Acquirers must verify the seller’s ownership rights and confirm no contractual or legal liens.

The due diligence process will also include an assessment of the licenses the company may have acquired to use IP. Or the licenses and rights the seller may have sold to third parties to generate a regular income.

Since subscription-based companies involve regular deliveries, the acquirer will want to check for their eCommerce capabilities. Cybersecurity concerns play a major role here and sellers should be ready for cyber forensic teams investigating the company’s operations.

Keep in mind that in mergers, acquisitions, or fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Regulatory and Compliance Considerations

Several federal and state laws, along with network regulations, are applicable to subscription-based companies. As the vertical evolves with technological advancements, laws designed to protect the ecosystem change, mainly to protect customers.

Acquiring entities will need assurance that the seller’s company complies with the latest regulations for selling products and providing services. Accordingly, dealmakers may have to deploy expert teams like legal, operational, finance, and billing to examine the target’s structure.

That’s because buyers are liable for the company’s non-compliance and may have to invest resources to resolve the issues. They may also have to cover the fines and penalties for historical compliance issues.

Potential buyers can identify the gaps and have the seller resolve them to avoid this possibility. Or, they can include covenants in the merger agreement, according to which the seller takes care of the issues before the deal closes.

Negotiating for lower prices to offset non-compliance risks is also an option. Several regulations are applicable, such as payment processing rules by payment networks and the Restore Online Shoppers’ Confidence Act (ROSCA).

The California Consumer Privacy Act Of 2018 has provisions that dictate how companies can store, process, and share consumer data. Similarly, card network operating rules dictate how card-issuing companies separate payments into categories.

These may include CIT (consumer-initiated transaction) and MIT (merchant-initiated transaction). Non-compliance can damage the brand’s reputation and cause a loss of consumer confidence.

These risks can transfer to the buyer’s company after the merger. This is why non-compliance is a crucial factor dealmakers consider before moving forward with an M&A in the subscription vertical.

Technology & Infrastructure Integration Considerations

Subscription-based firms are typically eCommerce organizations, especially if they provide physical goods delivered to the customer’s doorstep. Organizations like these have an extensive tech stack and detailed infrastructure to keep them functional.

Before entering into an acquisition deal, the buyer must evaluate the structure from an integration perspective. If the target will continue to operate as a subsidiary, integration may not be a significant issue. At best, the buyer will only have to organize the financials and management.

However, if the buyer intends to merge the company entirely, integration will likely involve a complete reorganization. The process could turn into an expensive proposition in terms of money and time.

Before entering the M&A deal, buyers and sellers should research the potential onboarding risks and challenges. They must also evaluate the impact on the stakeholders, subscribers, billing processes, customer service, and internal operations.

Any disruptions in product delivery could result in customer dissatisfaction, which subscription-based companies cannot risk. Accordingly, it is advisable to come up with a comprehensive post-merger integration plan that addresses the risks and challenges.

The plan must also account for technology integration, cultural alignment and employee coordination, and seamless customer migration. Dealmakers must develop a timeline and procedure for a smooth transition with minimal hurdles. Open communication lines always help the process along.

M&A in the Subscription Vertical is All About a Strategic Fit

As with any other segment, M&A in the subscription vertical is all about a strategic fit. However, this sector has the crucial advantage of a dedicated customer base. Churn rates remain low as long as the company maintains its product quality, continues to innovate, and provides top-notch service.

Even so, this industry does have unique challenges, and dealmakers should be prepared to deal with them. Staying updated with customers’ evolving needs and new products is crucial for long-term scalability and sustainability.

Acquirers should also retain the services of professionals who have an in-depth understanding of how this industry works. If executed efficiently, an M&A can potentially bring value to both parties. The best way to achieve success is to identify the goals and objectives of the merger in advance.

Whether expanding the target market, marketing to new customers, or acquiring IP, an M&A can get you there.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.


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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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