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 second 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. This article focuses on two avenues for expansion: licensing and franchising. Each of these options can be useful tools in delivering your fitness brand to a greater audience and enlarging your reach.
Your brand is represented by the intellectual property and goodwill associated with your company. As you expand your fitness empire, you should consider the use of a license agreement to ensure affiliates’ consistent use of your brand. License agreements will allow you to define the nature, manner and scope of use of your fitness brand throughout the empire.
Under a license agreement, you contractually authorize affiliates to use your intellectual property. You can specify the intellectual property to be used (including trademarks, copyrights, patents and trade secrets), outline specific instances in which affiliates may use the intellectual property and impose additional conditions on use of the intellectual property. You should also consider incorporating royalty terms into the agreement to define expected compensation for use of your brand.
Overall, an ironclad license agreement will help protect the goodwill associated with your brand, with the goal of keeping your brand distinctive. There are potential pitfalls to executing an ineffective license agreement with an affiliate, so you should consult legal counsel when drafting the agreement.
Franchising Your Brand
If you want to maintain control over your concept while still looking to expand by partnering with independent third parties, franchising may be an attractive option. Franchising allows a business (a franchisor) to expand rapidly without relying solely on its own capital—although franchising does require an initial investment to prepare the franchise contract and offering documents, as well as the preparation of an operations manual or similar materials to ensure that your methods and processes can be executed by an independent party.
Third-party franchisees are independent actors, meaning they are making the major investments, paying a franchise fee and assuming the risks associated with developing additional brand locations in exchange for access to a proven concept. You are familiar already with many of the fitness brands that have expanded through franchising, including Planet Ftiness, Orangetheory Fitness, Anytime Fitness, CycleBar and Snap Fitness.
Under federal law and most state franchise laws, a franchise is a continuing commercial relationship created by any business arrangement. As part of this arrangement, the franchisee first obtains a license to operate a business identified or associated with the franchisor’s trademark, or to offer, sell or distribute goods, services or commodities that are identified or associated with the franchisor’s trademark or that must meet the franchisor’s quality standards. The franchisor then has the right to exercise significant control over, or gives the franchisee significant assistance in, the franchisee’s method of operation. The franchisee, as a condition of obtaining or commencing the franchise operation, is required to make certain minimum payments to the franchisor prior to or within six months after commencing operation.
The Federal Trade Commission (FTC) and various state governmental authorities have adopted laws, rules and regulations regulating the offer and sale of franchises in the United States.
To comply with federal law, a franchisor must provide comprehensive pre-sale disclosures to each prospective franchisee by means of a written franchise disclosure document (FDD). This must happen at least 14 calendar days before the prospective franchisee signs a binding agreement with or makes any payment to the franchisor or an affiliate in connection with the proposed franchise sale.
The FDD is similar to a securities offering circular and contains 23 mandatory disclosure items, including disclosure of required fees, estimated initial investment, audited financials, a copy of the standard form franchise agreement as well as any ancillary agreements that must be executed by the franchisee.
Roughly 15 states also have laws that govern the offer and sale of franchises. These states generally require that franchisors make a formal filing or registration with the state, including the submission of the franchisor’s FDD, before offering or selling franchises in the state.
Fitness franchisors find the most success when they have a well-defined brand, concept and market, in addition to having established at least a few locations that are reliably profitable. Once proof of concept has been established, an aspiring franchisor should consult with an experienced attorney or franchise consultant to begin the process of developing a franchise offering.
Aspiring franchisors should also understand that sales, support and oversight of franchised locations are an essential part of a successful franchise. A franchisor is most successful when its franchisees are successful, and that means identifying good franchisee candidates, providing support during the development of each business and enforcing brand standards to ensure that each franchised business is enhancing the brand.
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.