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Beaut-AI | How Regulations Will Impact the Beauty Industry
In the-post-Covid world, retailers have been working hard to improve the customer experience as the retail landscape continues to move from in-store to online. From fitness to footwear, couture to cosmetics, data analytics and artificial intelligence are the new ingredients accelerating product development and providing consumers with personalised products and services.
According to McKinsey, in 2022 the beauty market generated approximately $430 billion in revenue and is expected to reach approximately $580 billion by 2027. Amongst the factors driving this growth is the increased digital sophistication of both brands and retailers.
Customer Feedback Analysis
Mintel’s 2024 Global Beauty and Personal Care Trends reports that “AI will permeate the beauty industry in the form of personalised recommendations, virtual try-on experiences and data-driven insights.”
The report goes on to say that “By analysing social media trends, customer feedback and market research, AI will help brands identify emerging beauty preferences and eco-friendly options.
Brands Positioning In AI
In the last few years brands and retailers have been deploying an increasingly sophisticated range of tools and analytics to enhance the consumer experience. For example, the Taiwanese company Perfect Corp has an extensive range of augmented reality enabled tools.
These include virtual make up, hair colour and nail effects, as well as photograph enhancements like virtual tattoos and personalised avatars. No7 used Perfect Corp’s artificial intelligence and augmented reality technology, for its cosmetic shade matching experience and Yves Saint Laurent, L’Oréal Paris, MAC Cosmetics, and Macy’s have all used Perfect Corp technologies to offer customers virtual try-ons of clothes and cosmetic products.
In 2018, L’Oreal acquired ModiFace and used its technologies for an AI makeup app with augmented reality in cooperation with Facebook. With Modiface technology customers use a smartphone camera ‘try on’ products virtually and then move to the product page to make a purchase.
In 2019, Coty released Wella Professionals AR enabled smart mirror for hair salons. Combining AR, facial recognition and 360° video capture that works in salon and on smartphones, Wella customers can retrieve past hair styles and view their hair at every angle in their smart mirror, creating a highly personalised customer experience.
DeepAR‘s augmented reality and emotional detection tools are being used by customers for virtual try-ons of Ray-bans sunglasses and Allbirds footwear, virtual make up by Lush and Sephora as well as augmented reality advertising. It teamed up recently with Sky to integrate AR to the Sky Glass TV using body-tracking software to deliver an AR experience for casual games, and fitness applications at room-scale.
Risks Of AI Implementation
Whilst Beaut-AI offers many benefits for brands and consumers, the collection, storage and processing of personal data, and in particular biometric data from facial recognition software is already subject to Data Privacy laws and regulations.
Companies looking to use technology in this area must guard against data breaches and misuse, ensuring that their policies include adequate customer consents to the collection and use of personal data, and in particular special category data such as biometric information. Beaut-AI will soon be subject to more rigorous and extensive regulations and policies in the EU and UK.
In the EU the use of artificial intelligence will be regulated by the AI Act, the world’s first comprehensive AI law. The new rules will establish obligations for providers and users depending on the level of risk from artificial intelligence. These will range from unacceptable risk AI systems (which are systems considered a threat to people), through to high and limited risk systems.
Unacceptable risk AI systems, such as cognitive behavioural manipulation of people or specific vulnerable groups, or social scoring people based on behaviour, socio-economic status or personal characteristics will be banned. High risk systems will have to comply with EU product legislation and certain categories of products will have to be registered on an EU database.
Limited risk AI systems will have to comply with transparency requirements that allow users to make informed decisions.
At present the UK does not intend to introduce new legislation. In the White Paper published in March 2023 the Government set out five principles underpinning its AI regulatory approach:
- Safety, security, and robustness
- Appropriate transparency and explainability
- Fairness
- Accountability and governance
- Contestability and redress.
Conclusion
As Mintel predicts “Transparency in AI systems will be crucial to building consumer trust and ensuring the disclosure of data sources and decision-making processes. Consumers will prioritise data protection and privacy by demanding customer consent and pushing brands to adhere to relevant regulations.”
Companies using AI-powered software solutions should pay close attention to the new regulatory landscape since the risk of damage to brand and reputation are moving to a whole new level.
To discuss any of the points raised in this article, please contact Marcus Rebuck or fill in the form below.
Share Purchases – Warranties & Disclosures
At its most basic, the only document required for the sale and purchase of shares in a company is a share transfer form executed by the seller to the buyer. But we would always advise a buyer of shares to enter into a binding Share Purchase Agreement (or ‘SPA’) with the seller, which document should contain detailed warranties from the seller.
When buying the shares in a company, you will be acquiring the company ‘warts and all’ – all the good aspects (i.e. the company’s assets, staff, contracts, etc.) but also the less good aspects (i.e. the company’s debts, tax liabilities, outstanding contractual obligations, any pending litigation, etc.). To protect the buyer, the SPA should contain detailed warranties from the seller about the company so that the buyer is made fully aware of both the good and the bad.
What Are Warranties?
Because warranties are statements of fact given by the seller about the company being sold which the buyer relies on when deciding whether to buy the company, if a warranty is later found to be untrue, the buyer may be entitled to make a claim by the buyer against the seller for any losses it may suffer as a result.
Generally, warranties can be provided in a standard format, but they sometimes need to be tailored to specific circumstances of the company and the transaction. But where the facts do not fit the ‘standard’ warranties, the seller will want to ‘disclose’ relevant facts which are contrary to the warranties given. Such disclosure is usually contained in a separate disclosure letter – which sets out clearly what facts have been disclosed (and therefore which facts the buyer is deemed to be aware of when entering into the SPA).
By way of example, if a warranty states that there are no anticipated liabilities other than those set out in the company’s balance sheet, but the seller is aware of a proposed litigation claim, details of the proposed claim should be separately ‘disclosed’ to be sure that the buyer cannot later say they were not made aware of that potential liability.
Who Benefits From Disclosure?
Disclosure by way of the disclosure letter can be of benefit to both the seller and the buyer: (i) it can provide a defence to the seller – if the seller might otherwise be in a breach of warranty (i.e. the seller’s warranty proves to be untrue), provided that the seller made a legally adequate disclosure against that warranty, the buyer cannot bring a claim against the seller in relation to that claim; (ii) it can also bring to light to the buyer certain information that it might not have obtained in the due diligence process.
The disclosure letter is often accompanied by a bundle of supporting documents which again serve to benefit both parties – the supporting documents make clear which documents the buyer has been made aware of, and the buyer may discover information that it did not obtain in the due diligence process.
It is important for any information that qualifies the seller’s warranties be incorporated in and properly disclosed in the disclosure letter. The seller should not assume that the buyer already knows something or that if the information was contained somewhere within documents previously supplied as part of the due diligence process (e.g. ‘buried’ in a data room) that this will provide protection for the seller in respect of a claim for an untrue warranty. The best starting point to provide the seller protection or a defence is to include the relevant information or disclosure within the disclosure letter.
What To Consider When Writing A Disclosure Letter
Some sellers leave the disclosure letter to the last minute just prior to exchange of the SPA, but the preparation of disclosures specific to the transaction requires a detailed analysis by the seller of each warranty contained in the SPA based on their knowledge of the business.
They need to carefully consider whether any facts or matters may exist that make any of the statements untrue. This needs to be addressed by the seller and its senior team members and its finance team or accountants, etc. The warranties need to be reviewed by all relevant senior personnel and this process should not rely upon the legal advisers to know whether a warranty is or is not untrue without qualification (i.e. whether disclosure is required against a warranty).
Where a thorough due diligence process has been undertaken, the buyer should not find any major surprises when they review the draft disclosure letter, but if any items do arise from the draft disclosure letter they can then be dealt with in the SPA before it is signed.
Conclusion
Although the disclosure process (when done properly) can be time-consuming, it is a valuable step in the company sale process which provides great protection, especially for the seller but also provides benefits the buyer. Parties may be tempted not to give the disclosure process the priority it deserves in a company sale transaction, given other issues that seem to be more urgent or important.
However, mistakes during disclosure can be extremely costly, especially where a claim that could have been easily avoided is brought by the buyer after completion which would have been completely avoided had the appropriate disclosure been made.
To discuss any of the points raised in this article, please contact Jason Greenberg or fill in the form below.
Understanding Search Funds and Entrepreneurial Acquisitions
Having been popular in the US for decades, search funds and entrepreneurial acquisitions are a steadily growing concept in the UK and Europe. One of the reasons for their growth is that millions of business owners are reaching retirement age with no successor.
In contrast to traditional entrepreneurship, where the entrepreneur comes up with an idea and then grows it into a company, the idea of entrepreneurship through acquisition is embedded in the acquired company. In this introduction to search funds and entrepreneurial acquisitions, I explain the process and set out the pros and cons.
What Is A Search Fund?
Search funds are investment vehicles through which aspiring entrepreneurs, known as “searchers,” raise capital from investors with the primary objective of identifying, acquiring, and managing an existing business.
Searchers are typically (but not always) young and ambitious professionals with limited entrepreneurial experience. They leverage the expertise of the investors. Investors provide the necessary capital, mentorship, and industry knowledge to aid in the search, acquisition, and successful operation of a business. In return, they receive a significant equity stake in the acquired company.
What Is The Process Of Entrepreneurial Acquisitions?
Entrepreneurial acquisitions typically follow the below process:
- Searchers begin by identifying potential acquisition targets. This involves researching industries, market trends, and specific companies that align with their interests and expertise. The goal is to find a business that has growth potential and fits their strategic vision. This can take one to two years and is funded by investors via a search fund. This fund pays for the searcher’s salary during this period as well as any associated searching costs such as initial due diligence.
- Once a target is identified, searchers will raise acquisition funds to purchase the business. Raising acquisition funds typically involves presenting a detailed business plan, financial projections, and a clear strategy for post-acquisition. Investors evaluate these proposals and decide whether the potential ROI is sufficient to risk providing the capital needed to acquire the target.
- After securing funding in principle, the searchers conduct extensive due diligence on the target company. This involves a comprehensive analysis of, for example, the company’s financials, operations, customer base, and competitive landscape. The goal is to assess the business’s health and identify any potential risks.
- If due diligence is successful, the searchers negotiate the terms of the acquisition with the target company’s owners. This includes finalising the purchase price, deal structure, and any post-acquisition arrangements. Once an agreement is reached, contracts are exchanged and ultimately the acquisition is completed.
- After acquiring the business, searchers typically take on the role of CEO. They implement their strategic vision, make operational improvements, and work towards the company’s growth and profitability. The involvement of investors as mentors and advisors can be crucial during this phase.
What Are The Benefits Of Search Funds And Entrepreneurial Acquisitions
Search funds allow aspiring entrepreneurs to enter the business world with a reduced level of personal financial risk. They can leverage the expertise and financial support of their investors to acquire an established business rather than starting from scratch.
In addition, the process of identifying, acquiring, and managing a business provides searchers with valuable hands-on experience in entrepreneurship. They gain insights into various aspects of business operations, from financial management to leadership.
Search funds also provide access to capital from experienced investors who often have a network of industry connections. This financial support, coupled with mentorship and guidance, increases the chances of a successful acquisition and business growth.
Finally, entrepreneurial acquisitions can breathe new life into existing businesses, preserving jobs, and maintaining continuity in the marketplace. This can be particularly significant in industries where succession planning is a challenge. For investors, search funds offer a unique opportunity to diversify their portfolios. Instead of traditional investments, they can back promising entrepreneurs and participate in the growth of the acquired businesses.
What Are The Advantages Of Search Funds And Entrepreneurial Acquisitions
Identifying a suitable acquisition target can be a challenging and time-consuming process. It requires in-depth research, market analysis, and a clear understanding of the searcher’s own strengths and weaknesses. In addition, raising capital for search funds can be a hurdle, especially for first-time searchers. Convincing investors to commit significant funds based on a business plan requires strong presentation and negotiation skills.
Inaccurate or incomplete due diligence can lead to costly mistakes. If searchers fail to uncover critical issues during the due diligence phase, both they and their investors can face significant monetary loss. Therefore, relying on the expertise of legal, financial, and other professional advisors (for example valuers) is paramount to mitigating the risks of acquiring a target company.
Wrapping Up
Search funds and entrepreneurial acquisitions have emerged as a viable pathway for aspiring entrepreneurs to enter the business world, leveraging the expertise and financial support of investors to acquire and revitalise existing businesses. It also provides owners of the target companies with a feasible succession plan.
Whether you are an investor, target business owner, or entrepreneur, we can assist you with all associated legal matters concerning search funds and entrepreneurial acquisitions.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.