December 27, 2017

Counterfeit Products On Amazon Put Company In Difficult Bind

Are You Looking To Buy An Amazon Business?

Our Due Diligence Checklist Will Limit Risk and Save You Money

By Karl Kronenberger
Partner, Kronenberger Rosenfeld

It's a jaw-dropping number: Amazon commands forty-four percent of all online sales. And, with what seems like an unstoppable trajectory, Amazon continues to shape the center of gravity in the online retail marketplace. Amazon's burgeoning marketplace is also being fueled in part by private label sellers who are driving that expansion.

What was an almost non-existent phenomena five years ago, today allows an entrepreneur to create a private brand, add a logo and outsource to a Chinese manufacturer. Suddenly a small start-up is competing with brands that have been around for decades.

The Amazon private label business model creates incredible value much faster than more conventional models. These new private label sellers are competing side by side with billion dollar brands. In many cases, they're even outselling the established brands on Amazon.

Instant Valuation Breeds Acquisition Fever

So, it's no surprise that acquiring private label Amazon businesses has become a hot and quickly developing market. And, with that comes a host of issues. How do you put a value on a private label brand sold exclusively on Amazon? Is the due diligence involved the same as a traditional business? The devil's in the details, as the old adage suggests.

Minimize Your Risk: The Amazon Private Label Due Diligence Checklist

The period prior to purchasing a new business, at which time the buyer examines all the details of the business, is commonly referred to as “due diligence.” Conducting due diligence for an Amazon business is unique. There are a host of potential pitfalls that don't exist in traditional businesses:

  • Identify Sales Trends — Any spikes or drops should be analyzed and explained. For example, if sales dropped for days or weeks, it could be that Amazon suspended the listing, or the seller's account, because of an Amazon policy violation. Spikes in revenue could be due to promotions run by the seller, and those details - including cost - should be disclosed to the buyer.
  • Determine the Level of Diversification of Sales — This pertains to sales on platforms other than Amazon. Analyzing where a seller's sales are coming from helps determine if the business is a good target for a buyer. For example, diversified sales can mitigate risk, since the business won't fail if one of the sales channels is cut off. An alternative view is that a lack of non-Amazon sales could mean an opportunity for a buyer, who has experience in opening non-Amazon sales channels.
  • Analyze Revenue by Product — Identify the key revenue drivers (products) for the business, and look for the “sleepers” which are growing within the last 12 months. Are there products that peaked months, or years ago? If yes, determine why and whether those same reasons could affect the products with growing sales.
  • Seller Performance Reports — Obtain copies of all Seller Performance reports from the seller's Amazon Seller Central. This should include screenshots of the Account Health page; the Performance metrics page; the Customer Feedback page; the Product Policies page; the Orders with Defects report; and the Performance Over Time report showing orders for all time. The seller should provide all documents relating to all suspensions related to seller performance, including all correspondence to and from Amazon and any POAs (Plans of Action) submitted to Amazon.
  • IP (intellectual property) Diligence — The seller should provide all filings with the Copyright Office and the U.S. Patent and Trademark Office; all prior complaints from Amazon or third parties, including all Amazon correspondence; all documents relating to all Amazon account suspensions due to IP infringement, including all correspondence with Amazon and third parties before and after the suspensions. The seller should provide a listing of all copyright, trademark or patent lawsuits where the seller was either a plaintiff or a defendant concerning any product included in the sale.
  • Manufacturers — Identify the total number of Amazon Standard Identification Numbers (ASINs) and the breakdown by manufacturers. Get copies of contracts with manufacturers, including confidentiality and exclusivity. Are costs locked in? Obtain all costs, including shipping and packaging. Look for costs that were not placed on the books. Get SOP for reordering. Get the pricing, delivery and other terms for all manufacturers and suppliers.
  • Web Services — The seller should identify all web services used by seller for customer service; monitoring sales and account health; inventory management; sales tax tracking and payment, including ongoing costs of such services.
  • Amazon Seller Operations — The seller should identify all people who keep the business running, and confirm how many hours they work per week. This includes time spent monitoring the Amazon Seller Central account; engaging in customer service; ordering product and managing inventory; and marketing. The seller should identify all vendors used in the business such as bookkeepers, writers and photographers, and their costs. The buyer should ask the seller to conduct a task audit to determine all the tasks involved in running the business and who is currently working on them.
  • Technical Information — The seller should prepare all details about non-Amazon stores, like Shopify; the seller's hosting relationships; email accounts; newsletter/autoresponder accounts; paid search accounts such as Adwords and Bing. All of this information should be provided to the buyer, except for password credentials, which should be provided after closing.
  • Traffic Information — Undisclosed paid traffic skews the profitability analysis. Therefore, the seller should identify all sources of internet traffic to the product listings of the products part of the sale. The seller should also provide website analytics for non-Amazon sites. Screenshots of the Campaign Manager page from within Seller Central with various date ranges (Lifetime, last twelve months, and year-to-date), should also be provided.
  • Research the Owner — A background check on the seller is highly advisable. Look for prior lawsuits, bankruptcies, criminal convictions, among other activities.
  • Legal Disclosures and Agreements with Consumers — The seller should provide all non-Amazon terms of service and privacy policies. If this is done as an asset sale, the privacy policy must permit such a transfer of personal information about customers. This of course only applies to information gathered on websites other than Amazon.


Buying a private brand sole primarily on Amazon can be an attractive, low cost investment, with the potential to increase in value over time. If you're interested in buying an Amazon private brand, contact me before you make a decision. Like any acquisition, there's the risk of making a big mistake, paying a lot, and not getting a return. Find the red flags in advance. A methodical approach is needed.

Your challenge is to keep focused on the main questions:

— Are the new private brands worth it?
— What methodology should be used to value them?

Contact Me

Kronenberger Rosenfeld has successfully helped clients perform due diligence in evaluating Amazon private label sellers. There's a lot on the line. I look forward to assisting you.

Karl Kronenberger
415-955-1155, Ext. 114
[email protected]

This entry was posted on Wednesday, December 27, 2017 and is filed under Resources & Self-Education, Internet Law News.

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