Acquisition & investment

Businesses, on the other hand, may be looking for acquisitions that bring them subscription expertise, technology or operations. But whatever the transaction, some features of subscription businesses – from pricing models to technology – carry implementation risks and may entail dealing with complex legal issues.

In the context of organic growth, some of these concerns can be dealt with over time, but in an acquisition, they become things that need to be dealt with urgently and simultaneously.

Assessing and maintaining value

Assessing – and subsequently maintaining – value in a subscription business deal can have its challenges.

Annual recurring revenue and customer acquisition cost should be relatively easy metrics to evaluate. Others, such as scalability, lifetime customer value and churn, are harder to assess, not least because the acquisition itself may change them. A business – or investor – also has to assess their own appetite for risk and any available options to hedge against negative outcomes.

In recent years subscription businesses have changed hands at a significant premium, with the ‘guarantee’ of recurring revenue itself seen as an important piece of risk mitigation.

This may still hold good in many cases, but – at least in B2C businesses – any suggestion of softening subscriber demand, combined with a regulatory trend towards increased consumer protection, may reduce both confidence and the premium an acquiror is prepared to pay. 

Cross-border concerns

We expect to see more cross-border deals as businesses with successful subscription models seek to expand into less developed markets. However, offering a proven subscription product or service in new jurisdictions may be challenging because of different legal, cultural and regulatory hurdles. Even within the EU, there can be different rules or nuances in legal frameworks across different member states. 

Businesses whose model relies on a single, unified offering should ensure that their due diligence and risk assessment covers every aspect of integration, including any anticipated changes in national regulatory regimes. Significant compliance risks may also follow if a transaction results in a business being regulated as a financial services provider. 

It may be possible to structure a subscription service so that a third party undertakes the regulated activities, but this option may still impose compliance requirements and, importantly, needs to be assessed at an early stage in any deal. Tax and VAT should also be front of mind for subscription services on a cross border basis.

Integration and transition

Businesses contemplating a subscription model need to consider how it sits alongside their existing operations. Subscriptions may not be suitable for all their existing products or services, or for some of their current customers. 

Nor, in many cases, will it be possible to move all customers into a subscription model overnight. A B2B organisation with many legacy contracts of varying length, for instance, would need to plan for a phased migration and devise a retention strategy to incentivise customers to move to subscriptions.

A subscription service sometimes supplements or replaces what would previously have been seen as aftersales care. In such a model, the subscription offering is reliant on the continuing primary business but provides an additional recurring revenue stream – which in some cases may actually be more profitable than the core business.