E-Commerce Subscription Box deal valuation

April 06, 2024

by a searcher from Ryerson University - Ted Rogers School of Management in Toronto, ON, Canada

Evaluating an e-commerce subscription box deal, they make about $1M in EBITDA, have about a 15% margin. As a sub box, they basically package up 3rd party brand's products and sell them to their audience.
It caught my attention because it does operate in an industry I have several years of experience with, have some connections with influencers, press, vendors, etc.

The team is the 3 cofounders plus one employee, and all 3 want a clean exit (leaving the one poor guy plus the new incoming buyer in charge). They also currently make most of the social/video/blog content for the brand so a replacement will be needed. The broker said they each want to leave with $2M in their pocket, so the minimum they say they'll accept is $6M, and if they don't get that, they'll just continue to operate it, grow it and sell later at a higher multiple.
Reason for selling is that they had an exit a few years ago in another industry, their non-compete and golden handcuffs expire this year, so they want to go back to that industry and do it again (sorta makes sense).

Some red flags I saw: The average LTV is only 6 months, and the churn rate is in the teens (according to benchmarks, avg churn should be 5-10% or less, and some other sub boxes I saw had LTVs of###-###-#### months). They have lost more than half of their total paying users since 2021, and only had a small upward trend in Q4 of 2023, although they explain it by the fact that they have been replacing the lower-tier subs with higher-tier subs, so the overall revenue decreased only slightly.

I've analyzed 12 other subscription box deals that transacted in the last couple of years that i was able to find publicly in the internet archives. Including their main competitor which was sold recently. -The average ask multiple was 4.66 EBITDA with their competitor specifically at 4.25; which is lower than their target of 6X -The average Profit Margin was 20% which is higher than theirs at 15% -The comparable team headcount, required to operate a business of their size is about 6-7 people, not one or two as they claim. So to properly operate it, hiring an additional 3-4 additional staff will be necessary;

What do you think of this deal, and how could this deal be arranged to work, given these circumstances? Thanks in advance!

Reply by a searcher
in Boulder, CO, USA

I think that deal is challenging as well for a few reasons. My background: I operated a venture-funded DTC subscription box business for 5 years, from zero to tens of millions. The churn number is a very big flag, as you noted. To make any sustainable profits with a 6 month CLT, I gather AOVs would have to be super high and CACs would have to be really low. That's hard to believe as those variables tend to move in opposite directions, and CACs in general have gotten super expensive in the last few years. Maybe it's possible if the brand has really strong organic driven by the content, you mentioned? If so, then that's a secret sauce / core part of the business that sounds like would be leaving with the founders. Most DTC brands I'm aware of that have reached profitability at scale (very, very few) have done it by layering on a lot of wholesale/retail on top DTC; lower gross margin, yes, but also much lower advertising / acquisition spend. As for comp multiples, note that eComm valuations have fallen off a cliff in the past couple of years as well, after being sky-high for a while- so comps need to be taken with that context as well. My sense is that eComm comps for $1m SDE businesses are closer to 4x. For reference, check out the listings at QuietLight; they're a solid brokerage for eComm companies. Happy to chat more if helpful - redacted

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

First off, you will need to adjust for the staff and your salary with the EBITDA, so you will need to see how this impacts EBITDA. For EBITDA around $1 million and 6x multiple is high, especially when 75% of the staff is going to go post close. There is also risk they could compete with you going forward. Obviously they are doing that with another industry they used to be in with a non-compete expiring, so you should expect they could do that to you in the future. Overall, this sounds like a challenging deal and one I would be cautious about. Unless you could get the price down quite substantially and build in some protections for you, it sounds high risk to me. Just my two cents. If you would like to talk about it or would like us to review the financials in more detail, you can reach me at redacted Good luck.

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