(Re)selling recommerce

Due diligence issues when acquiring a recommerce business

The recommerce market has experienced significant growth in recent years, partly driven by the increased cost of living but also due to consumers embracing more sustainable shopping habits. The market for second-hand goods is predicted to grow by 77.8% between 2023 and 2028 (ThredUp’s Resale Report, GlobalData (2024)). Peer-to-peer platforms have been pivotal in driving this trend forward – a recent example of growth in the sector has been Vinterior, which surpassed its fundraising target and secured a reported £3 million media-for-equity deal with Channel 4 this year. Established retailers are also entering this space, either creating their own resale platforms or by acquiring an existing player, such as Zara and Ikea’s inhouse resale initiative, and Etsy’s acquisition of Depop in 2021.

As consumer demand for second-hand goods continues to grow, we expect that M&A activity in the recommerce sector will only increase. However, acquiring a recommerce business comes with its own distinct set of challenges - ones that go far beyond those typically faced by traditional retail operations.

Key issues

The key to any successful acquisition in the recommerce sector will be to understand such issues:

Structure of the company/group 

As with all corporate acquisitions, the history of the corporate structure of the business should be considered. Has the company carried out an investment round? If so, what was the nature of it? Is there any external debt in place and what are its terms?

Recommerce businesses are more likely to have raised funds through crowdfunding and may have more angel investors. This will require careful management and additional administrative actions, such as following crowdfunding platform procedures to sell the shares.

As with any acquisition, correctly identifying the sellers, implementing a communications plan to get shareholders on board, and dealing with any issues arising from past transactions is key to ensuring 100% of the company is acquired and avoiding any last minute complexities.

As consumer demand for second-hand goods continues to grow, we expect that M&A activity in the recommerce sector will only increase.

Marketplace or reseller model 

The model of the target will influence where to focus due diligence. There will be different issues to navigate depending on the nature of the business. For example, a business could act in the capacity of a seller or as an intermediary to facilitate business to consumer sales or consumer to consumer sales. Each type of business will have different legal obligations, which will result in a different liability position.

A key concern for a reseller model, where the business itself becomes the seller, will be the need to ensure proper processes are in place to verify the quality of the goods being sold.

Dealing with consumers 

Ensuring that consumer law has been properly applied and adhered to is another issue to consider in due diligence. Where a marketplace model applies, the mix of traders and consumers selling to consumers creates a matrix of requirements which will need to be dealt with carefully. For more details on this, please see our previous ‘Recommerce Reads’ article on the topic. 

Regulatory requirements 

A recommerce platform must offer payment options that meet financial regulatory standards. Additionally, challenges can arise around refunds and returns. During due diligence, it's crucial to thoroughly examine these areas to ensure full compliance and avoid any potential breaches.

Intellectual Property 

Extra caution also needs to be taken to ensure that the business is not infringing third party IP. For example, what steps are being taken to authenticate items on the platform and ensure fake designer items are not being sold as the real deal, and how is this being monitored? Have terms and policies been implemented to manage compliant resale and take action in relation to counterfeit goods on the site?

Extra caution also needs to be taken to ensure that the business is not infringing third party IP.

Potential for growth 

Robust financial due diligence should also be carried out on the target. The margins and growth potential of a recommerce business differ from traditional retail, as they rely heavily on consumer-to-consumer activity and economic trends that influence the demand for second-hand goods. This will also inform the price to be paid for any such business and, in the event there is an earn-out or other deferred consideration mechanism included in the transaction, the financial due diligence will help to inform the appropriate calculation for this.