As part of our new “Best of Subscription Show” series, valuation experts David Foster, John McGovern, and Errol Glasser discuss creating value in the subscription business industry.

How do we create marketable value in our subscription business? Has the pandemic changed the way we need to think about creating marketable value in our business? Or is it the same as it always was? These are the questions subscription business owners are asking today.

At Subscription Show 2021, a panel of experts tackled this very topic. David Foster, CEO of Business Valuation Resources, described this group as having “subscription business in their bones.”

“One thing we have to recognize is that we’re in a context where platform companies are so huge, that there’s almost different segments in the subscription market,” said Foster.

While all subscription businesses have the same basic principle, not all subscription businesses are the same. How a company determines what marketable value they can create depends on what the market is demanding and capital availability – the ability to turn company assets into funds.

“Before you get into the subscription part of the industry, you have to listen to capital availability,” said Errol Glasser, partner at Triangle Capital, LLC.

It’s a unique time for companies to consider their capital availability. Negative interest rates, huge liquidity in the economy, many people wanting to spend money (to the tune of trillions of dollars) and a stock market running at record levels all affects what kind of value a company can create with their current assets.

According to John McGovern, CEO and owner of Grimes, McGovern & Associates, if your business is part of the subscription industry, “you’re the best looking one at the dance right now.”

The pandemic created a need and desire stronger than ever for goods and services to arrive at the front door. Even with the effects of the pandemic ebbing and flowing, consumers continue to spend money on subscriptions that make their lives easier.

It’s all about predictable cash flow

What impact has the pandemic had on the behavior of buyers? The shift in consumer spending and the availability of capital is making all B2B buyer segments very active. According to Glasser, normally an independent sponsor has a tough time getting attention from players in the deal. Now there’s a big race on the buyer side, and it’s helping sellers.

“Technology has changed so much. When you look at subscription companies, you ask, ‘How predictable is the cash flow coming from that company?’ That’s what’s creating value in the market,” said Glasser.

Glasser added that when the income is fairly predictable in a company, there’s a very high degree of confidence on the buyer’s side. Companies can now make money out of a deal because there is predictability and stability in the business. It’s lucrative and on a risk-adjusted basis.

“Just by definition, if we ask if the subscription industry is transforming value, when we look at any of these businesses that have recurring revenue models, they’re at the forefront of what buyers want to see. That is partially because of the cash flow characteristics,” said McGovern. “The subscription economy is always going to be at the forefront because of those [cash flow] characteristics.”

When sellers can see predictable cash flow, they’re more likely to accept more risk and place a higher valuation on the business.

The importance of KPIs

Value isn’t solely based on how much recurring revenue a company can generate, however. KPIs ‒ key performance indicators ‒ are also major factors for buyers.

“Dialing into the subscription economy and the value creation there, we’ve seen this huge transformation in the model. The value created in the subscription economy is parallel to the new KPIs that we’re all using to manage our own businesses,” said Foster.

“Today, people say, ‘What’s your CAC? What’s your LTV? What’s your ROAS?’ These are all new terms that just didn’t exist [a few years ago]! There was no way of measuring that stuff,” Glasser added. “Now ‘churn rate’ is the difference between a 30% growth year and a 10% growth year. That KPI is hugely driving value.”

Big data is what buyers are seeking and what companies must produce. Big data ‒ extremely large data sets that can be analyzed computationally to reveal patterns, trends, and associations around customer behavior ‒ is critical in helping companies stay competitive.

People will always push to understand what will give them an edge, help them be successful and predict cash flow. Cash flow and its predictability is always the bottom line, no matter how technology changes. Data that allows businesses to better predict cash flow with a greater degree of confidence will create a higher value for the company.

This can be seen in various technology and SaaS companies that acquire IT companies in order to own their audience. Why have an intermediary to go after an audience when it can be done in-house? Owning the audience, increasing the LTV, lowering acquisition costs all drive upward valuation.

Unadvertised discounting, quote to cash and customer experiences

Another key value driver that resonates with buyers is discounting. In the B2B world, unadvertised discounting has always been a thing. That’s because companies must ask themselves, what’re you going to do with your pricing to get the deal done? When McGovern saw companies in the last few years that didn’t offer unadvertised discounts, it was a great indicator of the value they provided in the market.

Additionally, buyers are looking closely at how efficient a company is at going from the time the salesperson quotes something to a potential customer all the way to getting the cash for the product or service, known as quote to cash. This timeline alone is a great indicator of a business’s ability to close business and get to cash. This, too, drives valuation because it creates a sense of confidence for buyers.

Getting closer to the transaction, the personal investor world has always been good about being the content provider and providing the platform to do the transactions. But not that many media and information companies have done that because the markets may not actually operate that way. Thanks to the pandemic, we’re seeing many more businesses engineer the capability to have 365 touch points throughout the year which, therefore, increases business.

It’s become more critical than ever to create an exceptional customer experience. Technology has made it easier than ever because, through big data, companies are able to assess their businesses and determine the sticking points where customers don’t complete a transaction. From there, subscription companies can reverse engineer sticking points and make it easier for consumers to move through the buying process.

An excellent direct customer relationship generates a higher value in a business. If a company can turn their product or service into a habit so the customer doesn’t eve’ know it’s there, then it makes the experience easy, painless, and reduces churn. Reaching this point in the customer relationship means the business has hit the peak of retaining customers and creating maximum value from their relationship.

Foster summed up the panelists’ thoughts nicely, “There’s this sea of money and there’s value being created in a new version of the subscription economy. Within that hugely successful paradigm, what really matters?”

Nowadays, creating marketable value within a subscription business doesn’t have to be hard. Through capital availability and predictable cash flow (something subscription businesses often already possess), subscription companies can establish or create a higher value for their company. By turning their big data into measurable KPIs, companies can create confidence in buyers and further utilize the capital in their business. And, when companies place a focus on creating a spectacular customer experience, they will see that reflected in a higher valuation of their business.