Despite the “doom and gloom” from some prognosticators, direct-to-consumer (“D2C”) businesses are still operating, still thriving, and still making money. Yes, there have been some spectacular failures. But the reasons for the failure of an individual business are often company-specific and do not reflect industry trends. Thus, there is still an enormous amount of merger and acquisition activity in the D-to-C market segment.

As many know, the animating business model behind D2C is the creation of a sales distribution method that eliminates traditional retail middlemen like wholesalers or distributors. Essentially, D2C is an online version of the old-fashioned brick-and-mortar “outlet store” — often located near the production facility — where consumers were able to purchase directly from the producer/manufacturer. In the online model, the business develops, produces, markets, and ships the product directly to the consumer via the internet and online commerce channels.

When considering the acquisition of or merger (“M&A”) with a direct-to-consumer business, there are some key legal and practical issues to consider that are specific to the traits of the D2C business model. If you are planning a D2C M&A, it is crucial to retain internet and business lawyers — like those at Revision Legal — with specific and successful experience in handling D2C business issues. Here are a few crucial issues to consider:

Price

It goes without question that price is always an issue with any business M&A. However, with D2C acquisitions, price needs a closer focus. Some D2C businesses have been overvalued in large part based on hype and unrealistic growth expectations. Realism is required from both buyers and sellers.

Increasing regulation of subscription-based business practices

If the target D2C business relies significantly on monthly or other periodic customer subscriptions, examine those company policies closely. There is a clear legal trend towards increased regulation of such business practices, including efforts at the federal level by the Federal Trade Commission to designate some subscription services as “unfair” and/or “deceptive” business practices.

Increasing regulations for child-focused sales and marketing

The same can be said for increasingly strict regulation of sales and marketing aimed at children and teenagers. If younger consumers are a large component of the target D2C sales, special attention is needed to ensure compliance with federal and state children’s privacy laws and regulations.

Consumer data privacy concerns

Yet another area of increasing regulatory focus is consumer privacy. Nearly half of the states have enacted some version of a consumer privacy statute. Thus, it is necessary to conduct due diligence into the amount of personal information collected by the target D2C business.

Consumer flight

Recognize that online consumers have many choices. As such, any merger or acquisition CAN generate “consumer flight” to similar online marketplaces. Thus, focus is required on questions like:

• Is this product/service truly unique? — the more unique the product/service, the less consumer flight can be expected
• Is the product/service driving sales, or is it something else (like a subscription service, free shipping, a dazzling marketing campaign, etc.)? Can these be sustained post-acquisition?
• Generally, can the current level of consumer loyalty be sustained post-acquisition?
• What are the current methods and costs associated with maintaining the current level of customer loyalty?

Integration

If the buyer is planning to integrate that target D2C business into a larger group of brands or companies, the focus should be on how that integration process will work. As just one example, integrating consumer data can be complex.

Contact the D2C and E-Commerce Attorneys at Revision Legal

For more information, contact the experienced D2C and E-commerce lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.