Franchising Growth in Beauty and Wellness Brands

Claudia Lewis: 00:11

You're building a beauty or wellness brand in a fast moving, highly competitive market.

Kristen Ruisi: 00:16

Standing out isn't just about developing quality products and creative campaigns. It's about navigating regulations, protecting your brand, and managing risk.

Claudia Lewis: 00:25

From FDA oversight and product claims to data privacy and consumer expectations, the legal and regulatory landscape is becoming more complex.

Kristen Ruisi: 00:34

Social media, influencer marketing and global expansion are only accelerating that complexity.

Claudia Lewis: 00:40

I'm Claudia Lewis.

Kristen Ruisi: 00:41

And I'm Kristen Ruisi. We're partners in Venable's Beauty and Wellness team.

Claudia Lewis: 00:46

On this podcast, we talk with our Venable colleagues and industry insiders about the legal and regulatory issues shaping the beauty and personal care market.

Kristen Ruisi: 00:55

And focus on practical guidance brands can use to stay compliant and competitive.

Claudia Lewis: 01:00

Welcome to the Beauty Law Glow-Up. This week, we're talking about how beauty companies can evaluate the possibility of franchising. Hi. I'm Claudia Lewis, cochair of Venable's FDA group. As beauty and wellness brands look for new ways to scale, franchising is emerging as an increasingly attractive growth model.

Claudia Lewis: 01:24

But with that opportunity comes a different set of legal and operational challenges. From protecting trademarks and maintaining brand consistency, to managing local marketing, influencer activity, training, and franchisee relationships. In this episode, we explore how beauty and wellness companies can evaluate whether franchising makes sense, structure their systems thoughtfully, and avoid the disputes that can arise as brands expand. To help us do that, we're talking to Michael Joblove, a partner and experienced litigator who focuses on franchise, real estate, and general commercial litigation. Michael, thank you so much for joining us today.

Claudia Lewis: 02:01

You're in beautiful Miami. I've been looking forward to this episode. You have advised and defended some of the largest franchise systems in the country, and we are really excited to get your perspective on how franchising is evolving, especially as more beauty and wellness brands look to scale through this model. What are you seeing right now? Are more beauty and wellness brands turning to franchising as a growth strategy?

Michael Joblove: 02:29

Well, yes. First of all, Claudia, glad to be here. It's really my pleasure. And, you know, here in Miami, I think we like to think of ourselves as one of the beauty and wellness capitals of perhaps The US and maybe even beyond. So it's a real pleasure to be here.

Michael Joblove: 02:43

And yes, we are seeing beauty and wellness brands as well as other business concepts turning to franchising as a growth strategy. And there's some real advantages to that. As with everything, there are advantages and disadvantages. But what the franchise branding model allows a business to do is to expand more rapidly. And that's because the business is using other people's capital to expand. So, if I'm a cosmetic company and I'm looking to grow outlets throughout the US, and, I don't want to spend our own company's capital or that's that's an issue in terms of the financials of our business. The franchise model allows the business to expand with other people's capital, other people's money in whatever movie that was, that somewhat famous phrase. And so that's the advantage to franchising and that's why many systems in the beauty and wellness area are utilizing franchising as a means of expansion. Now the downside of course to franchising is you lose a little bit of control, right?

Michael Joblove: 03:56

Because you're dealing with more personalities, you're dealing with other operators. And so if you do franchise and when companies do franchise, it's important for them, number one, to have a good training program in place because you want your franchisees to execute well. They're using your brand, your trademarks. They are creating hopefully, customer goodwill for your brand as it expands, but they are who you are. They are your public face to the consuming public.

Michael Joblove: 04:29

That's why it's important to have a good training program in place so that franchisees, if you are going to franchise, deliver your message. But given that there are more pluses than minuses, we are seeing companies in this area, wellness and health, using franchising, as an expanding business model.

Claudia Lewis: 04:53

So, Michael, you mentioned that you can use other people's money, and you also talked about the fact that you lose a little bit of control, but there's lots of upsides to that. And you talked about the training piece. So it leads me to the question about social media and influencers. A number of beauty brands are built through those platforms. How do you maintain consistency when franchisees are also marketing locally or working with influencers?

Michael Joblove: 05:20

Right. And I think there's two goals here of, let's say, the franchisor, that is of the company that owns the brand. The two items are concerned is one, protecting the value of your trademark. Right?

Claudia Lewis: 05:33

Mhmm.

Michael Joblove: 05:33

From a trademark perspective. But the other is delivering a consistent message. So even though social media and local advertising through various media and means are utilized in franchise system, it is very, very important that the franchisor, the company owning the brand, has a say or a right of approval to any media messages. And that is a standard provision in any franchise agreement. That is a franchisee, your local operators cannot put anything out there in terms of advertising or marketing without your approval.

Michael Joblove: 06:13

And as I said, that's important from a trademark protection standpoint, but it's also important from a marketing standpoint as well. Because one of the most important things in a franchise system is consistency of message. Right? That is what products you offer, how they're presented and how your marks are used. Now some systems in terms of how this might operate in the real world, some systems develop national ad campaigns, right?

Michael Joblove: 06:44

And so it's very common in a franchise system to have, let's say, a national ad fund that's created and your operators, your franchisees are required to deliver a percentage of their sales into the national ad fund. The other tool that's used is what we call a local spend requirement. Right? So your agreements would require your local operators, your franchisees to spend a percentage of their revenues on local marketing. Or you could have a combined approach, right, where you have your national spend at the company level, the franchisor level, and a local spend requirement.

Michael Joblove: 07:24

But whichever path is taken, whenever a franchisee intends to advertise on social media or even through the use of influencers, you, the franchise, or the company needs to be involved and needs to approve it. One other wrinkle here when we talk about influencers, right, when you sell franchises, there are regulations that are set out by the Federal Trade Commission and you're required to deliver an offering circular called a franchise disclosure document whose purpose is to summarize the terms of the agreement, who the franchisor is, what are the rights of the franchisee, what you as the franchisor may earn in terms of not only your royalties from franchisees, but also to the degree that suppliers may share some of their earnings with a franchisor. These are the sorts of things that need to be disclosed. One other item of disclosure though is if you have a public figure involved, let's say, and this goes more to the sale of a franchise than to the use of influencers in advertising, there are certain disclosure obligations under the FTC rule. So I would just, tell companies in the sector to be careful of that, to be mindful of that, and that's why it's always good to have good experienced franchise lawyers involved in this process.

Claudia Lewis: 08:49

Michael, you described something that seems straightforward, but also very technical and lots of options and path forward. Do you think there are any operational risks or unique legal issues with a beauty brand versus a traditional restaurant or a fitness center?

Michael Joblove: 09:05

Yeah. So the the one additional wrinkle I would say in this sector is that to the degree that the business may sell products that may get into the medical arena. Right? And so in those situations, unlike a hamburger or a gym Mhmm.

Michael Joblove: 09:23

In those kinds of businesses, you're going to have local regulations that may determine certain licensure requirements, certain, restrictions or regulations that go to the sale of such products. And so to me, that's an additional wrinkle. Now how do you protect for that? And and this applies both in the medical arena, but interestingly, also in what we would say the business format arena, that is, if you regulate the size and space requirements for the business, it's always important to conclude in the agreements, the requirement that the franchisees, your local operators do their own due diligence, and be mindful of their need to know local laws and local regulations, and to put the onus on them to determine how to comply with those. As a franchisor, you can provide some guidance, you could tell them things to look for or to be concerned about.

Michael Joblove: 10:23

But at the end of the day, that's their responsibility. So I think in that health and wellness area, that's an additional consideration that, or in the beauty area that a company may want to be mindful of.

Claudia Lewis: 10:36

Perfect. So we talked about the requirements. How... If I'm a beauty brand, Michael, how do I decide if I'm a founder, whether franchising makes sense versus continuing with the company as is outside of a franchise?

Michael Joblove: 10:52

What you need to do is sit down and sort of draw up a list of the pluses and minuses. So I said, on the plus side, the franchise model offers the opportunity to expand more rapidly. You're using other people's capital. But you also take on the obligation for good training and also good oversight because the relationship only begins when you sign that first franchise agreement with a franchisee, but it's a continuing ongoing relationship.

Michael Joblove: 11:23

And as the brand grows the franchisees, they're your partners, they're your family, right? And as any big organization, there are relationship issues that evolve over time. And so the downside, if you want to call it a downside or the other thing to consider is maybe the better way to say it, is if you develop as a company only business with your own outlet. You certainly have more control over relationships, over growth, and it's a bit less political because if it's a company owned business throughout, you're not selling or persuading new business ideas, new innovations. The senior management is essentially after listening to the people who report to them, ultimately in a company only business, the senior executive team ultimately makes the decision.

Michael Joblove: 12:21

In a franchise system, while the franchisor retains a lot of that authority, there is a significant amount of persuasion that is required. And you also need very well drafted franchise agreements and documents to assure that they provide you with the flexibility to mandate change often, if not through the franchise agreement itself, through the systems operations manual, which is often used as a vehicle for implementing change. And we've seen that in systems with the advent of technology, digital media, digital technology, apps in various businesses, where you enter long term franchise agreements. Many of the older agreements didn't contemplate the significant technological change that we've seen over time. So the company owned business, first of all, all the profits flow directly to you.

Michael Joblove: 13:19

You have more control, it's easier to be innovative. But in a franchise system, you may have the opportunity to grow more rapidly and so that's the advantage there.

Narrator: 13:32

Advertising law regulations are getting tougher and harder to navigate. On Venable's Ad Law Tool Kit Show, hosts Len Gordon, Shahin Rothermel and their colleagues break down the latest risks and trends from FTC investigations and privacy rules to influencer marketing, green claims, and state AG actions. Each episode gives brands practical insights to spot issues early and move forward with confidence. Search for the Ad Law Tool Kit Show wherever you listen.

Claudia Lewis: 14:06

So you mentioned a number of documents. You've also mentioned training and things like that. So I would imagine that when we have so many contracts, the governor relationship, including innovation and expansion in different areas that might not have previously been contemplated, there must be litigation, surrounding this... These relationships sometimes, Michael. What typically triggers a dispute between a franchiser and a franchisee? So I would say there's several common areas. One is a very simple one. That is the franchisee hasn't paid. They haven't paid the royalties. And look, most franchisors work hard to keep a business going, a franchise business going. Their goal is to grow, and there's no advantage to closing up locations.

Michael Joblove: 14:55

But that's a simple easy one, the failure to pay or, an agreement comes to its end date and the franchisees continue to operate using the franchisor's brand. But I would say mid relationship litigation also can involve system changes. And what happens in some big systems with poor relations, the franchisees create associations, almost like a unionized organization, to enhance their power to either impact change or resist change. And so that creates tension and the possibility of litigation.

Michael Joblove: 15:36

And then litigation also can arise where a brand is implementing changes, but you have resistant franchisees. And so this could be simple things like implementation of new point of sale equipment, digital menus, or new product lines, or new areas of business. So those are some of the broader areas where when things go bad, litigation arises. What I would say in a franchise system though, the thing to remember is this, a franchisor with good franchise lawyers can create agreements that give it strong right. But those strong rights also need to be balanced with the business goal of a healthy system with a healthy relationship between the franchisor and franchisee.

Michael Joblove: 16:25

So usually, in my view, a strongly written franchise agreement with strong legal rights of the franchisor grants the franchisor leverage to facilitate change or to enforce rights. But at the end of the day, your best hope is to use that leverage to get to a goal that at least has some consensus mindful of the need to have a positive franchise or franchisee relationship in your system.

Claudia Lewis: 16:55

So very practical approach, Michael, as I would expect from you. What is one mistake that you've seen brands make early in the franchising process that could cause a legal issue later?

Michael Joblove: 17:07

Well, I would say one of the most difficult things, especially for an emerging brand, a new brand, is selling franchises and at the same time attempting to maintain uniformity among your agreements and in the system. So a healthy franchise system generally depends on uniformity, that is uniformity of where the brands are sold, the business format, the products sold to the consuming public, the use of the trademarks, but also uniformity in the franchise agreements themselves, because that allows for a healthier and easier means of operating the system. So when you're first starting out, if you're McDonald's, have a lot of leverage. Hey, look at our success.

Michael Joblove: 17:53

We're the largest, let's say, burger chain in the world. But if you're new, if you're Mike's Burgers and I'm now selling to my first or second franchisee, they're going to have more leverage to say, well, your brand's untested. I want, let's say, the right to renew in five years instead of ten years. I want you to waive upfront franchise fees.

Michael Joblove: 18:17

I want the right to pay reduced royalties for the first five years, and then stage growth and royalties over time. And the problem is as your system grows, managing that essentially being able to track the individual rights of varying franchisees as you're managing the system. And those variances could also impact the timing of remodels, refreshing the look of the locations, modernizing to assure that you're meeting what your competitors are doing. So I would say in an emerging system, those are some of the small hills you have to climb as you develop the system.

Claudia Lewis: 19:02

I understand. I'm being given a signal that we're running out of time, so I'm going to ask you a question as we wrap up, Michael. What is one key takeaway you want brand owners or business executives to take from this podcast today?

Michael Joblove: 19:19

I think the key takeaway would would be to consider the pluses and minuses. Franchising is a model that's being used by lots of businesses in the beauty and wellness arena. It's very successful, and and they just ought to be mindful and prepare for how to execute to take advantage of the pluses and diminish the minuses.

Claudia Lewis: 19:41

And that involves calling you, Michael, I would imagine.

Michael Joblove: 19:44

Well, I'd love it if they did. Exactly.

Claudia Lewis: 19:47

Michael, I thank you for joining me today. I learned something, things that are on my mind and I'm raising it, some of these issues with clients who are considering these types of things. So thank you for giving me some of your afternoon.

Michael Joblove: 20:04

Thanks so much.

Claudia Lewis: 20:06

Okay. That's all the time we have for today. I wanna thank Michael for helping us better understand how beauty and wellness brands can use franchising as a growth strategy, what legal and operational issues they need to plan for early, and how thoughtful structure and training can make all the difference as a brand expands. You can read more about Venable's Beauty and Wellness team by visiting venable.com/beauty. I'm Claudia Lewis.

Claudia Lewis: 20:30

Thank you for listening to the Beauty Law Glow-Up