As the boutique fitness market continues to rapidly grow, entrepreneurs who want to take their fitness brands to the next level face many options. Each potential method of expansion has benefits and risks that must be considered.
This article is the first entry in a two-part series that explores brand expansion through the following topics: defining your concept, protecting your brand and expanding through direct corporate ownership and investment. The second article will focus on creating certification programs—either in-house or through a third party—and franchising your concept to like-minded entrepreneur partners.
Each of these options can be useful tools in delivering your fitness brand to a greater audience and enlarging your reach.
Cleaning House: Defining Your Concept and Protecting Your Brand
The first step to brand expansion is defining and refining your concept. What makes your business unique? Do you own specialized equipment or offer a unique mix of services? Can you claim a distinctive target market or boast a new approach to training or customer service? Ensuring your fitness brand is principled and offers clear benefits is key to retaining clients and forming the basis for future expansion.
In order to preserve what makes your club or studio special, training and certification programs are also vital. Proprietary in-house training programs foster consistency in the execution of the fitness model among employees and affiliates. In addition, proprietary certification programs can become their own vehicle for expansion. Zumba and CrossFit, for example, both originated as branded fitness regimens.
There is no one-size-fits-all approach for training programs. Although a company’s program might first focus on teaching the company’s fitness methodology to instructors and affiliates, if an entrepreneur plans to expand through licensing or franchising, they might consider adding a business development and branding component. Even if a company creates its own program, third-party certifications may remain useful because they provide established models that cover broad fitness concepts.
As soon as you have defined your brand, protecting that brand becomes mission critical. All aspiring fitness business owners should perform a global review of their intellectual property. This includes their website, intended brand name, their proprietary physical products, and related marketing materials, so that all can be protected against potential copycats by copyrights, patents and trademarks.
If you have not yet performed such a review, you should engage legal counsel to help perform the evaluation. This assessment should include a thorough investigation of whether other fitness or wellness brands use your name, so as to evaluate the possibility of future disputes based upon current usage. It should also include an assessment of whether any technology, process or product you have developed qualifies for patent protection. You should be aware that public disclosure of your invention starts a one-year window to file a patent application. If no application is filed during this window, important patent rights will be lost.
In addition, an important part of brand protection is general compliance with laws. Fitness studios are often subject to a myriad of local laws and restrictions—some that affect all small businesses and some that are specific to health clubs. These may include zoning restrictions, wage laws, health codes, advertising rules or consumer protection laws governing membership sales, membership contracts and protection of personal data. A violation of such existing laws can create immediate liability and cause significant long-term damage to a fitness brand. The more a brand expands, the larger of a target it can become for consumer claims and complaints.
Expanding Through Direct Ownership and Investment
Success in building a fitness brand depends on a great idea, strong management team, a group of trusted advisors, clear brand strategy and the ability to respond quickly when opportunities arise. Once you’ve achieved your first stage of success—for example, producing a unique fitness product or opening a new facility—you need to determine what the next level of success looks like to you.
If maintaining control over your brand and operations is important you, and you have significant capital on hand or interest from private investors, direct ownership and investment is likely a good option for expansion. Although the speed of your growth will be limited by the amount of money you can access and the personnel demands of multiple locations, direct ownership provides the most flexibility for making quick changes as the health and wellness market continues to evolve.
If you elect to maintain ownership over your company, you’ll be able to choose who invests in your growth and what those investments mean to your company. First, you will want to ensure that the legal structure of your business entity provides suitable protection to you and your investors. The corporate structure of your company may need to change to accommodate growth. Corporations, partnerships, limited liability companies and other related entities each have different rules regarding investment, taxation and ownership. These variations have practical ramifications, impacting layers of taxation and tax reporting, attractiveness to private equity investors and number of shareholders. You will need to understand the differences between each potential corporate entity and choose the legal structure that is the best fit for your business goals. You also may need to change your entity’s corporate structure as you grow.
Finding the right accountants and lawyers to help you navigate these various options and provide ongoing guidance can be critical to growth. The larger your business grows, the more expertise may be needed to solve complex problems and protect the brand, the investors and the owners.
You will also need to determine which type of investments you will be seeking. Prior to reaching out to any investors, you will need to review your pitch materials and the critical information that may be requested, including the financial history of your company and your projections for revenue and profit. A formal valuation of your company may be helpful if you think it will support ambitious growth forecasts. A valuation will also provide tools to determine how much of your ownership interest you are willing to give away to investors in exchange for a specified portion of the company.
A fitness startup typically would start its fundraising with a friends and family round, seeking smaller amounts of money from personal contacts who may or may not expect to be involved in your company going forward. Friends and family often invest in common stock, linking their lot with that of the entrepreneur.
You also might consider pursuing angel investors, who are often the bridge between friends and family investors and larger venture capital investors. Angel investors and later-stage investors typically seek preferred equity (or convertible notes convertible into preferred equity). Angel investors and venture capital firms will likely seek a greater amount of input into the direction and strategy of your company. For example, they may request a seat on your company’s board of directors or a board observer seat.
The preferred equity issued to angel and venture capital investors also typically includes restrictions on the business and requires investors’ consent to significant transactions. In addition, while there are limited exemptions under federal securities laws, many investments require that you prepare a prospectus, which can require a significant outlay of money to properly ready. Consultation with an attorney or accountant prior to pursuing investments of any size will protect both your interests and those of your investors, in addition to showing potential investors you are ready to elevate your company to the next stage of growth.
Keri McWilliams is a co-leader of Nixon Peabody's Franchise & Distribution team. She represents start-ups and mid-size companies across numerous industries, including restaurants, retailers, fitness centers, health concepts, and luxury brands, in all aspects of their corporate relationships. McWilliams is also a member of the Health and Wellness initiative, and the Food, Beverage and Agribusiness team.
Tarae Howell is a litigation attorney with Nixon Peabody who focuses his practice in intellectual property and complex commercial litigation matters.
Kristin Jamberdino is a commercial litigator with Nixon Peabody and a member of the Health and Wellness, Financial Services Litigation, ERISA Litigation, Private Fund Disputes and Arts & Cultural Institutions teams. She represents a wide range of corporations, entities and individuals in federal and state court litigations and provides counsel regarding corporate governance, intellectual property and employment issues.