Why Subscription Business Is a Good Buy

A few months ago, I spoke with someone who is quite focused on buying and then selling subscription businesses, primarily SaaS.

The fun thing about subscription businesses is that with bit of a work, you can increase the valuation by a lot.

Let’s dig down a bit to see the valuation at play.

Suppose there’s a subscription business with $9.99 monthly ticket and 1000 users. This business would generate $119,880 ($9.99 x 12 x 1000) per year. Assuming that the business has 50% margins, the annual net profits come down to $59,940. Further assuming that the small-cap internet businesses are valued at 4x annual net profits, this business would be valued at $239,760 ($59,940 x 4).

My acquaintance would buy this business like this.

He would then focus on trying to improve the basics for the business: optimizing the sales funnel, getting the optimal value out of the user by offering additional membership plans and up-sells, offering better customer support etc.

By the end of the optimization process, he would try to push the average order value to $11.99 instead of $9.99 and the user-base to 1100, up from 1000.

Upon revaluation, the business would be worth a lot more. Annual gross revenues would be $158,268 (11.99 x 12 x 1100). Annual net profits would be $79,134. And the new valuation would be $316,536; an increase of $76,776 or 32%.

All with minor optimizations.

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