Acquisition &
investment
Regulation
Enforcement
& litigation
Finance
Enforcement
Litigation
Digital
Data
protection
Contracts
Cybersecurity
Consumer protection
Consumer
credit
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
Cross-border concerns
Notification
and consent
Pre-deal due diligence
Assessing and maintaining value
Data and competition
If an organisation offering subscriptions operates in a regulated sector such as financial services or telecoms, they may be subject to additional cybersecurity requirements. For example, in the UK, telecoms providers are subject to various obligations to maintain secure networks and services, with rules on how to prevent security breaches and what to do if security is breached – and with potentially hefty fines for non-compliance.
Cybersecurity
*A contract term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer. There are also some terms which are automatically unenforceable, such as those excluding or limiting liability in relation to death or personal injury caused by negligence.
Consumers rarely get to negotiate contracts with businesses, particularly contracts formed online. Consumer law attempts to address this imbalance between the consumer and a business in several ways.
In the UK, for example, the Consumer Rights Act 2015 requires that the terms of a contract must be transparent, which means it is expressed in plain language. The terms must also be fair – unfair terms* in consumer contracts are unenforceable. The Competition and Markets Authority (CMA) and other relevant bodies and regulators may take civil action to stop businesses breaching consumer law (if they use terms that are unfair or not transparent).
Contracts
Where consumers contract with businesses online, they typically have a right to cancel the contract without having to give any reason (a so-called “cooling off” right). Depending on the particular circumstances, there are some exceptions to this cooling off right and, in most cases, there are options for businesses to ensure that consumers must pay the costs of returning goods.
Businesses offering subscriptions to consumers must carefully consider the consumer protection regulatory measures to avoid adverse regulatory scrutiny.
Cooling off?
It should not be possible for a consumer to sign up to a promotional (or free) trial period without first being clearly informed about – and agreeing to – certain important information, such as details regarding price and contract duration of the initial and subsequent periods, and information that (for example) a paid subscription will automatically begin when the promotional trial ends.
Trials
If a consumer clicks a ‘pay’ or other order button to confirm a paid-for subscription, that order button must be labelled with unambiguous language that placing the order entails an obligation to pay. If certain legal requirements in this area are not met, a consumer may not be bound by the contract.
The business also needs the consumer's express, pre-contract consent to take additional payments (for example, beyond those agreed for the business’s main obligation under the contract).
Payment
Where subscription contracts are entered into online, certain information must be included in a clear and comprehensible manner, in a way that is appropriate to the means of distance communication used. Other information must be provided in a clear and prominent manner. This includes information on main characteristics, price and charges, duration of the contract, conditions for terminating and so on.
Information
Cooling Off?
Trials
Payment
Information
Growth prospects
The right model
Potential
benefits
Offers and discounts
Pricing benefits
Greater convenience
More certainty
Exclusive access
Reduced
waste
Smarter
inventory management
Leaner
supply
chains
Upselling opportunities
More
focused marketing
Richer
customer
data
Improved margins
Stronger cashflow
Recurring revenues
Wider
market access
Deeper customer relationships
For customers
For companies
Potential benefits
Understanding the evolving regulatory and political landscape relevant to subscription businesses
Appreciating the scale of the commercial and operational transformation involved
Having an understanding of, and an ability to leverage, subscription capacity prior to any acquisition of it
is transferred to the customer, and giving the customer a balanced deal with a frictionless customer service and an appropriate exit opportunity
Ensuring only an appropriate amount of risk
with a compelling, premium and realistic business proposition
Offering a subscription service
Five key considerations for companies to remain competitive in this industry
The right model
Subscriptions work best when they are win-win, offering clear benefits for both the provider and the customer. If you want to reap the rewards of the digital economy, you should take time to understand the digital landscape, and develop a position of competitive advantage, with a proposition tailored to your target market.
Growth prospects
On the other hand, certain existing subscription businesses in particular industries are experiencing plateaued, slow growth or even a slight decline in subscriber numbers, anticipated to be caused by a combination of economic pressure and heightened price and service competition. Exploring innovative opportunities for growth is particularly important for these businesses to avoid a further stagnation or downturn in their subscriber numbers.
It remains to be seen how certain subscriptions will survive and thrive in light of a changing economic climate. Whilst some assume that a subscription which can be easily cancelled could be a prime expenditure that customers cut in a challenging economic climate, there is a valid argument to suggest that the growth of certain subscriptions will, in fact, accelerate with customers having less cash to spend on other outgoing (like eating or drinking out) and instead choosing to spend more time at home where they would benefit from a low cost subscription service. In the longer term, we expect to see growth, innovation and consolidation, in both B2C and B2B subscription businesses. We also expect significantly more cross-border expansion as domestic markets mature and subscription businesses become more able at handling issues such as scalability, cultural differences, and multiple regulatory frameworks.
Subscription opportunities and the potential market size vary across different sectors.
On the one hand there are new and exciting opportunities for innovative subscription offerings that are being explored across a number of industries, often for products or services that have traditionally been sold as a one-time purchase model. For example, cafés are offering coffee subscriptions and companies in the cosmetics and life sciences sectors are also adopting subscription models for products such as make-up, contact lenses and vitamins. Several automotive companies are also now exploring subscriptions to enable certain additional features and functionality within their cars (for example, heated seats and heated steering wheels) and to allow for the use of a car over a defined period of time (distinct from more traditional purchase, finance or lease agreement arrangements). In some cases these types of subscriptions to use cars also include other costs associated with running and maintaining a car, such as servicing costs.
Digital
The EU’s Digital Services Act (“DSA”) and Digital Markets Act (“DMA”) contain rules which could affect businesses offering subscriptions.
For example, the DSA prohibits so-called ‘dark patterns’ where an online interface is designed in a way that deceives or manipulates its recipients or materially distorts or impairs their ability to make free and informed decisions. The DSA examples “making the procedure for terminating a service more difficult than subscribing to it” as a practice where such dark patterns could materialise and on which the European Commission may issue further guidance in future.
The applicability of certain obligations in the DSA and DMA can depend on the role, size and impact of an online business, making it of crucial importance that online businesses offering subscriptions carefully consider and assess the applicability of these digital rules when implementing them.
A subscription practice may be morally questionable, even though not expressly prohibited by law. For example, a subscription business could continue to take payments from a subscriber who is not using the particular product or service for any number of reasons. In these circumstances, it could be considered to be unethical, although not necessarily an infringement of an express legal requirement.
If, however, a consumer is no longer using a particular service they have subscribed to simply because they have decided that they want the ease, or flexibility, to restart the service at any time, it is a conscious decision of the subscriber and seems less likely to be considered unethical.
Ethical considerations
Obtaining the consumer’s explicit consent to enter into a subscription.
Avoiding using phrases such as ‘cancel any time’ if it gives an inaccurate impression that the consumer can terminate at any point during the duration of the contract and get a pro-rata refund.
Providing certain clear and prominent information on relevant details of the subscription so that the consumer can make a fully informed choice about auto-renewal.
A consumer-centric model
New information requirements: Subscription businesses will need to give clearer information to consumers before they enter into a subscription contract. Lots of information needs to be provided, and there are particular requirements about how it is provided. Some of the information must be given as part of the sign-up process rather than simply being made available (for example, using links).
Reminder notices: Subscription businesses will need to send reminders to consumers in certain situations, including before the first renewal payment and in respect of certain subsequent renewal payments. Reminders must include certain information and be sent at certain times.
Cancellation: The Bill includes various changes in relation to cancellation, including requirements designed to ensure that consumers can cancel subscriptions more easily. Subscription businesses will also need to give the consumer a notice acknowledging that the contract is at an end, and refund any overpayment by the consumer.
Cooling-off periods: The Bill proposes that consumers will benefit from new cooling-off periods whereby they can cancel the contract and potentially get a refund. There will be an initial cooling-off period when the contract begins, followed by another cooling-off period in certain specific situations only.
Future changes: The Secretary of State will have various powers to amend the requirements in relation to subscription contracts, including by amending, removing or adding to the list of required information, and extending the cooling-off periods.
Consumer protection regimes
The automatic renewal of subscriptions is a subject of particular regulatory scrutiny.
Regulators can be concerned that many customers are unwittingly ‘trapped’ or disadvantaged when their subscriptions automatically renew or when free trials automatically convert to paid services. (Find out more in our section on Enforcement)
Automatic renewal
UK and EU consumers who sign up to subscriptions for goods or services benefit from consumer protection laws governing the information that must be provided on price, contract length and cancellation and refund rights.
However, consumer protection requirements for subscriptions can have subtle differences across jurisdictions, making cross-border compliance more challenging, particularly for businesses that are unfamiliar with the interplay between subscriptions and consumer law, data protection and e-commerce requirements.
Consumer protection
Ethics
Centric
model
Protection regimes
Automatic renewal
Businesses providing subscriptions collect certain types of personal data, such as names, billing addresses and email addresses. As well as ensuring that data is handled securely, they need to implement other data protection measures. This may involve devising a data retention policy, ensuring privacy by the design of the development and application of data analytics for their subscription business model and anonymising certain data associated with expired or terminated subscriptions after a set period.
Subscribers can have qualified rights to erasure (‘the right to be forgotten’) that businesses should prepare for and be able to comply with. Further, certain data portability rights also allow subscribers to obtain and reuse their personal data for their own purposes across different services. Businesses should ensure that they understand and can comply with such rights.
Personal data used by subscription businesses in different jurisdictions and industries, from financial services to the healthcare and insurance industries, can have differing requirements and nuanced considerations, as well as different value ascribed to it as a business asset and potential risk if there is a data breach.
The amount of data obtained from subscriptions enables targeted and personalised advertising and marketing, typically driven by ever-more-sophisticated algorithms. But using data in this way also means a business has to observe additional – often extensive – data and consumer protection requirements. In the UK, for example, direct marketing is covered by rules including the E-Commerce Regulations, the Consumer Protection from Unfair Trading Regulations, the CAP Code, the DMA Code, and data protection and e-privacy laws.
There is considerable scope for subscription businesses to fall foul of direct marketing rules, particularly where subscribers have opted out of receiving marketing messages or not opted in to receiving them – creating the requirement to ensure that permitted service communications with them (for example, about renewals) do not contain content which might constitute marketing. Any communications with former customers – for example, offering them the opportunity of a fresh subscription – also needs to be approached carefully, as similar pitfalls are likely to exist.
When facing declining subscriber numbers, some businesses could consider taking advantage of the data available to it for advertising purposes by launching a separate ad-supported tier of an existing subscription service. In recent years, certain businesses providing subscription video-on-demand (SVOD) services have announced a lower cost advertising-based video-on-demand (AVOD) subscription alongside their full price subscription. Offering a cheaper subscription by using advertising could help a business to deaccelerate declining subscriber numbers and improve competition in the market.
Data protection
In the UK a hire or credit agreement is regulated under the Consumer Credit Act 1974 and requires Financial Conduct Authority (FCA) authorisation. The FCA aims to ensure that organisations assess consumers properly to ensure that they can repay their loans, and that consumers who fall into arrears are treated fairly when organisations collect their debts. An FCA-commissioned review has also proposed that ‘buy-now-pay-later’ subscription products, also known as ‘deferred payment credit’, should be the subject of specific regulation, which is anticipated to come into force in 2023.
Many subscription services involve activity that may be classed as the provision of financial services – including the provision of goods through a subscription that constitutes a hire agreement or a credit agreement.
Businesses can navigate this issue in different ways. In some cases, a subscription service can be structured to avoid such issues, or a subscription business could use an authorised third party provider of financial services. In other cases, the subscription business determines that the benefit which will accrue to it is worth the regulatory and compliance burden of obtaining authorisation itself.
Consumer credit
During the pre-deal due diligence buyers – or investors – will need to consider the purchasing company’s internal technology and infrastructure and how compatible that is with the prospective business and if it can support a subscription business / model.
The internal technology and infrastructure should be reviewed alongside its associated potential risks, above and beyond, information purely available on the number of subscribers, subscription products and the duration of the subscriptions. Using technology to report and communicate transparently and clearly to both customers and investors or buyers pre- and post- transaction is essential to facilitate a smooth transaction and minimise risk.
However, automating communications and payments by using technology can also create risk: for instance, if there are any errors in communications or payments (such as a missed communication or an under- or over-payment from customers) pre-transaction, this could have a ripple effect across multiple subscribers that should be explored in diligence and resolved pre-transaction.
Pre-deal due diligence
Assessing and maintaining value
If a transaction results in a change to the service provider, product or service itself, or requires changes to the terms of a subscription, businesses may be required to obtain express consent from subscribers to continue the subscription in the desired way.
Depending on the transaction and particular subscription, businesses may also need to follow prescribed notice and information requirements.
Notification and consent
Cross-border concerns
Data and competition
Integration and transition
The subscription model is appealing to a variety of investors, buyers and entrepreneurs (see Acquisition & investment). As in all M&A, the structure and financing of a transaction involving a subscription business depends on considerations specific to the individual deal.
However, it is worth noting that the subscription model – thanks to the relatively high degree of predictability and transparency it brings to turnover – can lend itself particularly well to financial instruments such as earn-outs.
M&A
A subscription model may introduce new layers of complexity for business which develop international offerings. Where companies provide cross-border subscription services, the payment for subscriptions will require a range of tax issues to be addressed (including determining the location of the subscriber for tax purposes, and establishing the local parameters of taxable services). Handling these badly can land a business with a substantial tax demand.
Where financial or other regulated services or products are offered to subscribers, these will also need to meet local requirements, however secondary they may be to the subscription service itself.
International
Another option sometimes used by start-ups and early stage businesses is crowdfunding. This can integrate effectively with subscription models, especially for consumer-focused start-ups, which may be able to offer investors the incentive of non-cash benefits related to their subscriptions.
Crowdfunding
Revenue-based lending
Embedded finance
Governments and regulators are focused on ensuring consumers enter into fair and transparent contracts.
As consumer protection regimes are being toughened, their interplay with cybersecurity and data protection regulation is presenting a complex regulatory landscape for businesses to navigate.
Regulation
Digital
Data
protection
Cybersecurity
Consumer protection
Consumer
credit
Contracts
Digital
Data
protection
Cybersecurity
Consumer protection
Consumer
credit
Contracts
Digital
Data
protection
Cybersecurity
Consumer protection
Consumer
credit
Contracts
Digital
Data
protection
Cybersecurity
Consumer protection
Consumer
credit
Contracts
Digital
Data
protection
Cybersecurity
Consumer protection
Consumer
credit
Contracts
Integration
and transition
Data and competition
Cross-border concerns
Notification
and consent
Pre-deal due diligence
Assessing and maintaining value
Integration
and transition
Data and competition
Cross-border concerns
Notification
and consent
Pre-deal due diligence
Assessing and maintaining value
Integration
and transition
Data and competition
Cross-border concerns
Notification
and consent
Pre-deal due diligence
Assessing and maintaining value
Integration
and transition
Data and competition
Cross-border concerns
Notification
and consent
Pre-deal due diligence
Assessing and maintaining value
Integration
and transition
Data and competition
Cross-border concerns
Notification
and consent
Pre-deal due diligence
Assessing and maintaining value
Acquisition & Investment
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
If, for example, a B2B company pivots to become a B2C business, selling directly to consumers through subscriptions, all the above considerations might apply in addition to compliance with applicable regulation.
Finance
The section on Regulation highlights some of the areas in which subscription businesses may encounter regulatory and compliance issues. In practice, how have regulators been handling the subscription economy? What legal disputes could affect subscription businesses?
Enforcement & litigation
Regulation in action
Regulators elsewhere, such as the General Directorate for Competition Policy, Consumer Affairs and Fraud Control (DGCCRF) in France and the Federal Trade Commission (FTC) in the US, have also turned their attention to auto-renewing subscriptions. For example, in 2021 the FTC told businesses that “tricking consumers into signing up for subscription programs or trapping them when they try to cancel is against the law” and warned them that they would “face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy.
Some sectors – such as financial services and telecoms – are subject to significant additional regulation. For example, in the UK, consumers buying goods or services in the banking, insurance, investments, pensions, mortgages and financial advice sectors have certain consumer rights enforced by the Financial Conduct Authority.
Where a subscription business breaches data protection laws, the ICO has significant enforcement actions, which can include discretion to impose significant penalties depending on the severity of the breach or whether the breach was reported or concealed.
The CMA’s investigation into the online console video gaming sector explored the auto-renewing subscriptions provided by Nintendo Switch, Sony PlayStation and Microsoft Xbox. As part of this investigation, the CMA engaged with these businesses to seek improvements for consumers using auto-renewing subscriptions for online console gaming services. The CMA secured certain measures from some businesses regarding their auto-renewing subscriptions. Examples of such measures include:
Enforcement
Notifications
Clear notifications regarding future price increases
Comms
Communications for subscribers who are inactive (as they haven’t used their subscription for a long period of time)
Refunds
Refunds for existing customers on particular longer length contracts
Transparent
information
More transparent information upfront to help customers understand their subscriptions and to make the auto-renewing nature, cancellation options, cost and timings of the subscription clear
Whilst this investigation focussed on companies in the online console video gaming sector, the outcome of the investigation should be carefully considered by companies offering subscriptions in other sectors where it could also be transferrable, in order to ensure compliance with consumer protection laws and reduce the likelihood of scrutiny from consumer regulators.
One other type of litigation to which subscription businesses may be particularly
prone – and which can be closely connected to regulatory issues – is the class action.
The US has already seen multimillion-dollar settlements in a number of class actions over auto-renewal, and more cases are in the pipeline. As laws relevant to auto-renewal are tightened in jurisdictions around the world, the chances are that there will be more such actions elsewhere – potentially relating to, for example, unfair commercial practices, unfair contract terms, data protection, or defective products or services.
For more on the continuing growth of class actions outside the US, see our European Class Action Report 2022.
Litigation
Litigation
Enforcement
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.
It may still hold good in many cases, but – at least in B2C businesses – any suggestion of softening subscriber demand, combined with a regulatory trend to protect consumers, may reduce confidence.
Increasingly, evidence suggests that protecting value through minimising churn, maximising recurring and upselling revenue requires both best-in-class delivery and a frequently refreshed or upgraded offering.
Embedded finance is the availability of financial products provided by non-financial institutions which are integrated into a company’s infrastructure and are placed in a non-financial customer journey. They are described as being available “at the point of customer need”.
Recurring revenues also open up new financing possibilities. Subscription providers are well-placed to offer their subscribers embedded finance products. Examples include payments (such as digital wallets and instant payments), lending (such as buy-now-pay-later solutions), and insurance.
According to McKinsey, in 2021 embedded finance revenues were $20bn in the US alone; Oracle estimates the worldwide market will be worth more than $7tn in the next 10 years. As well as boosting subscription providers, the embedded finance market presents significant opportunities for banks and tech providers to partner with businesses offering these products.
Interest is not charged, but a fee is added to the principal and likewise repaid from the borrower’s revenue. If revenue declines, the borrower will make a proportionately smaller repayment to the lender and the loan will take longer to be paid-off. However, if revenue increases, the loan will be repaid more quickly.
This type of lending relies on technology and the availability of data. Not only will the loan agreement be made according to various metrics and the borrower’s financial information, but typically the lender will expect to have a live feed from the borrower’s bank accounts, integrated with data sources such as e-commerce engines and advertising platforms, to enable ongoing real time analysis. Repayments will be taken automatically, sometimes direct from the payment processor.
Revenue-based lending is an embedded finance product.
While many subscription businesses are content to use traditional equity and debt funding, a growing number benefit from revenue-based lending. This can be particularly helpful for early stage businesses, whose founders may wish to avoid both diluting their stakes by issuing equity, and borrowing – relatively expensively – from venture debt providers or banks that provide growth debt.
In revenue-based lending model, a principal amount is advanced, unsecured, with no conventional maturity date. Instead, the lender advancing the funds receives regular repayments in an amount equal to a share of the borrower’s revenue.
Many consumers have come to expect personalised services from subscription providers, with bespoke communications, recommendations and deals tailored by behind-the-scenes AI. The analysis of ‘big data’, which can include both personal and non-personal data, also helps businesses identify trends and key points in the subscription cycle, enabling better forecasting, the maximisation of opportunities and the management of risk.
But the collection and safe handling of personal data that this requires can pose significant security and regulatory issues, particularly for companies that have not previously had a significant online business or have not been major data processors or data controllers. It is crucial they understand how to process such data compliantly well in advance of launching a subscription service, as a first step to ensuring that appropriate systems are in place and staff are appropriately trained.
Deep and rich subscriber data is a key part of many subscription models. Some competition authorities have begun to take an interest in whether access to or the accumulation of such data might give an unfair competitive advantage to firms in a strong market position or constitute a barrier to entry, especially in online markets.
If the accumulation or merging of consumer data were found to have an anticompetitive impact, a competition authority might restrict the merged entity’s ability to combine its data, or potentially even require it to grant competitors access to the dataset. Subscriptions models may also provide an opportunity to draw and lock in customers in certain circumstances.
As well as attracting competition scrutiny, these issues will have to be considered under nascent digital regulation, such as under the EU Digital Markets Act which prohibits designated “gatekeepers” from certain practices such as combining different data sources without GDPR-standard user consent.
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).
The subscription model has to be ‘plugged in’ to every part of the business,
from sales and marketing through customer service to IT and finance. As well
as needing effective alignment through change management, this is likely to require technology migration and integration. Businesses will aim to understand the scope of this through pre-deal due diligence, but may still wish to seek appropriate representations or warranties concerning, for example, the performance or compatibility of systems.
It is also vital to establish that the crucial intellectual property behind the technology is being acquired or appropriately licenced (taking into account any likely developments and future expansion). In some subscription models, the key IP may even have multiple owners.
Integration
and transition
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The UK’s primary consumer regulator, the Competition and Markets Authority (CMA), has, in recent years, opened consumer law investigations into subscription businesses in sectors including online console video gaming and anti-virus software. Whilst the sector focus of these investigations is quite narrow, the outcome will likely have a widespread impact across the whole subscription industry.
Following the conclusion of the CMA’s enforcement action in the anti-virus software sector, it published ‘Compliance Principles for anti-virus software businesses’. These principles can be transferred across to businesses in other sectors that use automatically renewing contracts with UK consumers. The CMA considers that following these principles will help businesses comply with consumer protection law and help to ensure no enforcement action is undertaken.
Under the proposed Digital Markets, Competition and Consumer Bill, if enacted, the CMA will be able to enforce consumer law directly, by fining businesses up to 10% of their annual global turnover and require businesses to compensate consumers directly.
Like any business, a subscription business may become involved in commercial litigation – if, for example, it fails to provide a product or service. Subscription businesses often rely heavily on technology, and, therefore, can be exposed to a wide range of tech disputes (including disputes over contracts, investment, IP, cyber issues, data breaches, and software or data licensing audits).
Private equity and venture capital investors have shown considerable interest in subscription businesses, not least because of the cash flow from recurring revenue, or the opportunities offered by an easy route from licensing to a recurring subscription model in for example, software-as-a-service (SaaS).
They have also been attracted to businesses offering for example, subscription management and billing platforms.
Over the last five years there has been significant investment in start-ups with subscription models. The subscription model is particularly appealing to investors as they provide a more relationship driven business model with re-occurring revenue.
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. Other concerns typically include integration, compliance, change management and business planning.
In the context of organic growth, some of these questions 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
Integration and transition
Pre-deal due diligence
Notification and consent
Cross-border concerns
Data and competition
Integration and transition
Data and competition
Cross-border concerns
Notification and consent
Pre-deal due diligence
Assessing and maintaining value
Integration and transition
Data and competition
Cross-border concerns
Notification and consent
Pre-deal due diligence
Assessing and maintaining value
Integration and transition
Data and competition
Cross-border concerns
Notification and consent
Pre-deal due diligence
Assessing and maintaining value
Integration and transition
Data and competition
Cross-border concerns
Notification and consent
Pre-deal due diligence
Assessing and maintaining value
Integration and transition
Data and competition
Cross-border concerns
Notification and consent
Pre-deal due diligence
Assessing and maintaining value
Assessing and 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.
It may still hold good in many cases, but – at least in B2C businesses – any suggestion of softening subscriber demand, combined with a regulatory trend to protect consumers, may reduce confidence.
Increasingly, evidence suggests that protecting value through minimising churn, maximising recurring and upselling revenue requires both best-in-class delivery and a frequently refreshed or upgraded offering.
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
M&A
International
Crowdfunding
Revenue-based lending
Embedded finance
Litigation
Enforcement
Litigation
Enforcement
Digital
Data protection
Cybersecurity
Consumer protection
Consumer credit
Contracts
Digital
Data protection
Cybersecurity
Consumer protection
Consumer credit
Contracts
Digital
Data protection
Cybersecurity
Consumer protection
Consumer credit
Contracts
Digital
Data protection
Cybersecurity
Consumer protection
Consumer credit
Contracts
Digital
Data protection
Cybersecurity
Consumer protection
Consumer credit
Contracts
Digital
Data protection
Cybersecurity
Consumer protection
Consumer credit
Contracts
Enforcement
& litigation
Acquisition & Investment
Finance
Regulation
The right
model
Growth prospects
Potential
benefits
Regulation
Finance
Acquisition & Investment
Enforcement
& litigation
Growth prospects
Potential benefits
The right model
Growth prospects
Potential benefits
Potential benefits
The right model
Finance
Enforcement & litigation
Regulation
Acquisition & Investment
Enforcement & litigation
Finance
Acquisition & Investment
Regulation
EU member states have been implementing the Omnibus Directive which imposes obligations relating to financial penalties for breaches of certain consumer protection laws (including some that are up to at least 4% of a business’s annual turnover in the EU member state(s) concerned).
The UK has proposed reforms the Digital Markets, Competition and Consumer Bill that, if enacted, would allow the CMA to enforce consumer law directly, and to fine firms up to 10% of their annual global turnover. The CMA will also be able to direct businesses to take enhanced consumer measures as the CMA considers is just and reasonable (without having to go to Court), which could include businesses having to compensate consumers directly.
If enacted, the reforms would also require subscription businesses to take certain steps including:
Additionally, to adopt a consumer-centric model and ultimately lower the risk profile, businesses may consider obtaining the consumer’s explicit consent to enter into a subscription contract.
Additionally, to adopt a consumer-centric model and ultimately lower the risk profile, businesses may consider obtaining the consumer’s explicit consent to enter into a subscription contract.
Additionally, to further lower the risk profile with a consumer-centric model, a business could consider:
Regardless of whether the proposed legislation is enacted, these are sensible steps for businesses to take if they want to adopt a consumer-friendly outlook by managing risk constructively and developing a long-term, trusted relationship with their subscribers. These new compliance requirements may, however, create significant technological and operational expense for businesses, particularly for businesses whose current practice does not align with all of these requirements.
Clive Gringras,
Partner
Contact
Charles Kerrigan,
Partner
Contact
Anthony Waller, Partner
Contact
The subscription model is appealing to a variety of investors, buyers and entrepreneurs.
Businesses may be looking for acquisitions that bring them subscription expertise, technology and/or operations.
Clive Gringras, Partner and Edmund Roper, Associate
Contact
Clive Gringras, Partner
Contact
Charles Kerrigan, Partner
Contact
The subscription model is appealing to a variety of investors, buyers and entrepreneurs.
Businesses may be looking for acquisitions that bring them subscription expertise, technology and/or operations.
Anthony Waller, Partner
Contact
EU member states have been implementing the Omnibus Directive which imposes obligations relating to financial penalties for breaches of certain consumer protection laws (including some that are up to at least 4% of a business’s annual turnover in the EU member state(s) concerned).
The UK has proposed reforms the Digital Markets, Competition and Consumer Bill that, if enacted, would allow the CMA to enforce consumer law directly, and to fine firms up to 10% of their annual global turnover. The CMA will also be able to direct businesses to take enhanced consumer measures as the CMA considers is just and reasonable (without having to go to Court), which could include businesses having to compensate consumers directly.
If enacted, the reforms would also require subscription businesses to take certain steps including:
Information
Payment
Trials
Cooling Off?
Automatic renewal
Protection regimes
Centric
model
Ethics
A business that moves to a subscription model may enjoy easier financing in the long term. The predictability of revenues often makes it easier to arrange debt on more attractive terms, and may even enable the business to cut the size of its debt facility.
economy? What legal disputes could affect subscription businesses?
A business that moves to a subscription model may enjoy easier financing in the long term. The predictability of revenues often makes it easier to arrange debt on more attractive terms, and may even enable the business to cut the size of its debt facility.
But before this, as a business shifts to the subscription economy, additional finance may be required – for example, to cover disruption to cashflow, or for capex required for the new business model, or to deal with the costs involved in retaining and leasing assets rather than selling them.
Any business moving towards a subscription model will have some specific finance-related concerns, such as:
Cashflow Some banks have developed specialist financial instruments to help businesses cover changes in cashflow after partial or wholesale conversion to a subscription model.
Assets A move to a subscription model can leave the business with assets whose balance sheet treatment will have to be reconsidered. The optimal solution may be a form of leasing or even the creation of a special purpose vehicle to hold the assets – something which may open up additional financing opportunities, such as investment from third parties.
Accounting Any company whose balance sheet changes significantly should fully understand any accounting or similar issues that might follow – including, for example, issues around revenue recognition, tax implications, possible breaches of covenants, any impact on KPIs or bonuses etc.
The massive growth in subscription activity over the last decade is one feature of the continuing development of the digital economy. Its focus was initially on media and streaming services, but technological advances – particularly the growth of the cloud and new payment systems – have enabled a much wider range of companies to become ‘subscription businesses’ or to adopt a ‘subscription model’.
The subscription economy
Clive Gringras, Partner and
Edmund Roper, Associate
Contact
Assess the risk, and potential effect, of a cyber-attack or other data breach for the business.
Establish a robust cyber risk management strategy and incident response plan, embedding cyber risk management at all levels in the business.
The heart of a successful subscription business is its data. Given the confidential and personal nature of information processed by subscription businesses, cybersecurity and safe data management is a key consideration.
While all businesses are at risk of cyber-attacks, the subscription model can present some particular vulnerabilities. Online subscriptions can be subject to phishing, account takeovers, reselling and password selling or sharing.
Key steps for subscription businesses to reduce the risk of a cyber-attack or other data breach:
Direct marketing
Personal data
Clive Gringras, Partner and
Edmund Roper, Associate
Contact
If, for example, a B2B company pivots to become a B2C business, selling directly to consumers through subscriptions, all the above considerations might apply in addition to compliance with applicable regulation.
But before this, as a business shifts to the subscription economy, additional finance may be required – for example, to cover disruption to cashflow, or for capex required for the new business model, or to deal with the costs involved in retaining and leasing assets rather than selling them.
Any business moving towards a subscription model will have some specific finance-related concerns, such as:
Assess the risk, and potential effect, of a cyber-attack or other data breach for the business.
Establish a robust cyber risk management strategy and incident response plan, embedding cyber risk management at all levels in the business.
The heart of a successful subscription business is its data. Given the confidential and personal nature of information processed by subscription businesses, cybersecurity and safe data management is a key consideration.
While all businesses are at risk of cyber-attacks, the subscription model can present some particular vulnerabilities. Online subscriptions can be subject to phishing, account takeovers, reselling and password selling or sharing.
Key steps for subscription businesses to reduce the risk of a cyber-attack or other data breach:
Direct marketing
Personal data
Regardless of whether the proposed legislation is enacted, these are sensible steps for businesses to take if they want to adopt a consumer-friendly outlook by managing risk constructively and developing a long-term, trusted relationship with their subscribers. These new compliance requirements may, however, create significant technological and operational expense for businesses, particularly for businesses whose current practice does not align with all of these requirements.