Can’t live without your Netflix and Peloton subscriptions? You’re not alone. While 2020 was the year that COVID-19 ushered in a worldwide pandemic, it was also the year that the consumer shift to digital accelerated across nearly every sector. As a result, consumers are enjoying and relying on subscription-based digital services more than ever.

Consumer subscription services (CSS) — defined as any consumer service that is delivered in a software-only format — have increased in usage dramatically and ivestors are watching. GP Bullhound has been tracking the growing ecosystem and expects CSS revenue to surpass $150 billion by 2023. 

If you’re a founder of a subscription-based mobile app, you’ve probably seen your own uptick of user engagement and conversions over the past several months. And while you may be fully dedicated to building a sustainable business with happy, long-term customers, you may also be wondering if your company could be considered for an acquisition. What should you do if another company wants to buy your company? What is the actual value of your company? What metrics matter the most to an acquirer and how do you optimize for the likelihood of being acquired?

We talked to Eric Crowley, investment banker and advisor at GP Bullhound, about the rise of CSS businesses, and what founders should think about when considering a path towards acquisition.

How CSS mobile app businesses are being valued for M&A

CSS apps (including enterprise) are typically valued by revenue metrics and certain product and marketing KPIs. For financial indicators, this can include:

• Growth rates
• Gross and Net Bookings
• GAAP Revenue
• Gross margins
• EBITDA
• Profitability and cash-flow 

Oftentimes, you may hear about an acquisition in terms of the “revenue multiple,” which is expressed as a function of annualized revenue. Eric explains that, “These multiples (e.g. 3x or 10x) may vary widely, so it’s difficult to place a specific benchmark on the right multiple for your business. Your best bet to optimize value is to have multiple bidders at the table.”

For KPIs, acquirers may look at:

• Customer churn
• LTV of customers
• CAC and the proportion of organic vs. paid traffic

Is there such a thing as relying too much on paid traffic? According to Eric, “There’s no hard and fast line. There are companies that are scaling economically with ads on Facebook and Google. Overall though, if more than 50% of your traffic comes from paid, you need to closely monitor your LTV/CAC rates and ensure that your marketing spend is profitable long-term.”

Eric notes that while leveraging paid can be an easy way to start building a community, founders should always consider developing a sustainable business model that doesn’t just rely on paid for growth. 

Investors look for sustainable differentiators that show a company can grow without paid traffic, because paid can be difficult to scale.

“Investors look for sustainable differentiators that show a company can grow without paid traffic, because paid can be difficult to scale,” says Eric. “For example, in the fitness space, there are many apps that are advertising to the same audience of people in their late teens through mid-30s. This audience can be expensive to acquire, and difficult to acquire at scale.”

Overall, Eric observes that acquirers looking at consumer subscription services apps focus on business metrics, versus evaluating and acquiring for talent. “I do not see a lot of acqui-hires on my end,” says Eric. “For CSS, the value of the app is the product—the software-based services—as well as its thriving customer base and valuable content.”

Growth resources:

• Incremental Growth 101: What Organic Uplift is and Why it Matters
• 5 Tips to Maximize ROAS
• Mobile Growth: How to Win at Paid User Acquisition

Equity or an acquisition: Know your endgame

When deciding whether to raise equity, pursue an acquisition, some combination both, or even neither, Eric urges founders to consider what they want.

Is this a product or business that you want to continue to build post-acquisition? Or do you want to sell it and buy a yacht in Tahiti?

“Before I engage with a client, I always ask them: ‘What do you want? Why are we having this conversation?’” says Eric. “Is this a product or business that you want to continue to build post-acquisition? Or do you want to sell it and buy a yacht in Tahiti? Conversely, if you raise $20M in equity now, do you want to work on the same product for five years? Or would you rather sell for $50M and call it a day? What’s the right exit and right timeline?”

Once Eric and the client have aligned on these goals, Eric follows-up with other questions to ensure the founder is prepared to reach this goal. “I ask them questions that any buyer will want to know. For example, are your business finances in order? What kind of information do you have about your users? How are you managing your user base? If you don’t have that data, it’s hard to determine your company’s performance and value, and we have to be able to establish that baseline of trust.”

From there, Eric helps the client create a GTM plan based on the business’ current state and where they want to go. “This could be a list of things the client needs to detail—retention, understanding their gross margins, or showing the trends and history of their business’ performance,” says Eric. “Preparing for an acquisition is so much more than just helping them create a business projection and a slide deck.”

Consumer subscription services are here to stay

We’ve all heard the billion dollar question for founders running CSS apps: Will there be subscription fatigue?

On this, Eric is bullish, and has built his business around this point of view. “Subscriptions are here to stay. It’s illustrated in the data,” said Eric. “E-commerce is a good industry comparison to CSS. Trends and buying behaviors that were supposed to happen in 5 years accelerated within 6 months.”

Eric points out that in almost every other area of their lives, consumers don’t necessarily think about whether they have too many subscriptions in their lives. Instead, they focus on utility and value.

If the product is bringing happiness and utility to your life, and you are receiving value, then that is something you’re willing to pay for.

“For example, in any given week, you may purchase a variety of beverages: Coffee, tea, beer, wine, and more,” said Eric. “If the product is bringing happiness and utility to your life, and you are receiving value, then that is something you’re willing to pay for. Similarly, you may not be interested in subscribing to multiple health and fitness apps. But if you’re getting value from one for yoga, and another for biking, you’re willing to pay for that.”

Eric also thinks that CSS products have the potential to see more consistent consumption, even during economic uncertainty. “People pay hundreds of dollars for an Equinox membership. That they might not pay $4.99 for an app is flawed logic,” said Eric. “When budgets become tight, small purchases like consumer subscription services become affordable luxuries that save people time and money.” 

In fact, Eric anticipates that what’s next for the industry could be consolidation. “Consumers want to have all of their needs within a specific vertical met, all under one roof,” said Eric. “Health and fitness apps understand this, which is why you see apps offering support for mental health, sleep, fitness, and more—all in one.”

“This concept of bundling is becoming more apparent in the CSS space. First, CSS apps must understand how to monetize and provide content, and build that underlying technology layer and start embedding content within that. After that, bundling services lets businesses scale and meet customer needs across different demographics. Bundling lets businesses add tiers, or add different services at different prices. This can increase the average customer value, and it’s also driving M&A.”

Overall, Eric considers these adjustments in consumer behaviors a long-term shift. “Phones are more integrated into all of our lives now,” said Eric. “The changes we saw immediately after COVID-19 are life changes, not just small habit changes. Once consumers and businesses have made these technology adjustments, very rarely does an industry go backward.”

What to expect from an investment bank

Eric sees himself, and GP Bullhound, as advisers for founders, not advocates one way or the other for selling or for raising equity. 

“Our job is to provide the best advice based on what we see in the market to our clients,” says Eric. “We determine what we think is your potential for success, and if we have a shared vision on how to get there, we’ll be a great partner. Our success depends on helping you reach your goals.”

“When you are considering an investment bank or legal advisor, ask for references, look at their past deals, or read their research. However, my biggest guidance to any founder when they are choosing an advisor is, ‘Do you trust this person, and can you work with this person for several intense months?’ M&A transactions are complicated and require long hours over several months. A close and trusting working relationship between a founder and their advisors is crucial.”

Conclusion

It’s never premature for founders to consider the outcomes they want for their businesses. In fact, waiting to decide what you want only when the opportunity presents itself may be too late in the game. Founders are better served knowing what success looks like for them, so that as different opportunities to raise equity or pursue an acquisition arise, they’ll know which ones will meet their vision.