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.

Due Diligence Priorities in a D2C Acquisition

The legal due diligence process for a D2C acquisition differs meaningfully from a traditional brick-and-mortar business acquisition. Because the entire value proposition of a D2C company rests on its digital infrastructure, customer relationships, and data assets, buyers must conduct a thorough review of areas that would be secondary concerns in other deal types.

Intellectual Property and Digital Assets

For most D2C businesses, the domain name, the brand trademarks, the website code, and the proprietary product formulations or designs are the core assets. Buyers must confirm that the target actually owns — not merely licenses — these assets. Key IP due diligence steps include:

• Confirming that all trademarks are federally registered, that maintenance filings are current, and that no pending oppositions or cancellation proceedings exist at the USPTO
• Reviewing all software licenses, platform agreements (Shopify, WooCommerce, etc.), and API agreements to confirm that they are transferable upon a change of control
• Auditing the target’s use of third-party content, images, and music to confirm proper licensing — D2C companies frequently use stock imagery and music in their marketing materials under licenses that do not survive a business transfer
• Reviewing any proprietary manufacturing processes or recipes for trade secret protections and the adequacy of those protections

Consumer Data and Privacy Compliance

A D2C company’s customer list is frequently its most valuable asset. However, that customer data comes with significant legal obligations. Buyers must scrutinize:

• How data was collected. Customer data collected through a website must have been obtained under a privacy policy that permitted the specific uses now contemplated. If the target’s privacy policy did not disclose that customer data would be transferred in a sale, the transfer itself may violate state consumer privacy laws.
• COPPA compliance. If the target markets to or inadvertently collects data from children under 13, compliance with the Children’s Online Privacy Protection Act (15 U.S.C. §§ 6501 et seq.) is mandatory and carries civil penalties of up to $51,744 per violation.
• State privacy law compliance. With more than 20 states now having comprehensive data privacy laws, a D2C company operating nationally must be reviewed against each applicable statute. Data security incident history must also be thoroughly disclosed and evaluated.

Subscription and Negative Option Billing

Many D2C companies generate recurring revenue through subscription models. As noted, these are under increasing regulatory scrutiny. The FTC’s 2024 “click-to-cancel” rule under the Negative Option Rule (16 C.F.R. Part 425) requires that subscription cancellation be as simple as sign-up. Prior to closing, buyers should confirm that the target’s subscription terms and cancellation mechanisms comply with ROSCA (15 U.S.C. §§ 8401 et seq.) and the FTC’s current guidance, and that no regulatory investigations are pending.

Advertising and Marketing Claims

D2C businesses live and die by their marketing. Buyers must review whether the target’s advertising claims — particularly health or performance claims — are substantiated. Unsubstantiated advertising claims can expose the buyer to FTC enforcement actions, NAD challenges, and class action litigation under state consumer protection statutes like California’s CLRA (Cal. Civ. Code §§ 1750 et seq.) and UCL (Cal. Bus. & Prof. Code §§ 17200 et seq.). A history of unresolved consumer complaints or BBB complaints is a red flag that warrants deeper investigation.

The Purchase Agreement

The representations and warranties in the purchase agreement must reflect the D2C-specific risks outlined above. Sellers should expect buyers to demand specific representations regarding IP ownership, data privacy compliance, the absence of regulatory investigations, and the current status of all platform and vendor agreements. Earn-out provisions tied to post-acquisition customer retention metrics are common in D2C deals and must be carefully defined to avoid disputes.

Whether you are buying, selling, or seeking investment in a D2C business, the legal complexity demands counsel with specific experience in the sector. Contact the D2C and E-Commerce attorneys at Revision Legal or visit our e-commerce practice page to discuss your transaction.

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.