Same, but different

Article  \  12 Dec 2013

When manufacturers sell their retail outlets, both the seller and the buyer of that retail business have to think about how to deal with the retail shop name.

Some of the issues

When the manufacturing business' name is used as the retail shop name, common ownership will mean there is no issue.  Using the same name for effectively two different businesses is not a problem when both are owned by one business. But what happens if the manufacturing business decides to sell its retail business to another independent business? 

Manufacturing businesses that set up and sell related retail outlets need to consider the implications of allowing another unrelated business to use their name (either with or without conditions) or should a name change be a condition of purchase?  And the retail business needs to consider what name is best for its business. Would the retailer be better off buying the outlets and starting business afresh with a new name?  Or, should the retailer try to negotiate a deal whereby it can continue to trade under the existing name?  These are complex issues.  There is no right or wrong answer.

But it is important that these issues be considered and resolved to avoid downstream misunderstandings.  If the parties decide that the retail business can continue trading under the manufacturing name, then it is critical that this be documented.  It is also critical the retail business understands fully what this arrangement means for its business and its possible future effects.

A possible scenario…

Let's take a hypothetical clothing manufacturer 'Pigment' as an example. The brand PIGMENT could be registered as a trade mark for 'clothing manufacturing' services and 'clothing' products. If Pigment also offers 'clothing design services' for other clothing manufacturers, then those services should also be protected, as could 'retail and wholesale services'.

Over the years Pigment grows its manufacturing base through mergers and takeovers.  After ten years of business, it has five factories. At each factory they run a factory shop. The business also has eight other retail outlets throughout New Zealand.

But, with no in-house retail expertise and facing increased competition, Pigment decides that 'retail' is too hard. It decides to sell the eight retail stores. But Pigment wishes to keep its five factory shops because they provide access to customers and their views about product lines. Pigment can also sell surplus stock, old stock and seconds through its factory stores.

The manufacturing business puts its eight retail outlets on the market.  After several bites, they finally find an interested buyer - but the buyer also wants to continue trading under the name Pigment. They see huge value in continuing to trade under the already successful retail chain name. There is equity in the PIGMENT brand. The retail chain has a strong customer base and the business has credibility from its association with the well-respected manufacturer, PIGMENT.     

The manufacturing business is not so sure. What happens if the retail business founders - will that damage the manufacturing business? What if the retail chain sells clothes of an inferior quality to theirs? Would the retail chain want to use the brand PIGMENT on clothing made by other manufacturers?

The manufacturing business had intended selling its retail outlets without its name but, now the question has been asked, Pigment must decide whether the retail business buyer can use the name. If the manufacturer agrees to the retail chain continuing to trade under the name Pigment, then this arrangement needs to be captured in a trade mark licence that clearly spells out the terms and conditions of such use.  An IP lawyer would be able to draft a suitable licence agreement.

A consideration for the retail owner, if it decides to enter a licence, is the future 'saleability' of its business. While Pigment may allow the initial retail business to use its name, it may not be so keen to allow others. It is not unusual for the rights to the use of a name to extinguish on the sale of a business.

Whether the retail buyer can continue to use the name could impact on the price paid for the business. Without the ability to use Pigment, the retail buyer may see the retail chain as having reduced value.

But, if the manufacturer refuses to licence use of its name, the retailer has an opportunity to select its own unique brand which it can then register as a trade mark.

Every business should consider registering its brand as a trade mark.  A business' brand is one of its most valuable assets.

Although the retail business would have to create a business afresh with no existing reputation to rely on, it can build a business with a name that it owns and controls. It would not have to worry about having the 'right to use' its name revoked in the future. This is an important consideration.

The retail business would, over time, build up equity in its own name. This could significantly influence the value of the retail business. Ownership would also provide the retail owner with greater flexibility should it decide to franchise its business or sell it at a later time.

The last word

There are advantages and disadvantages in starting out with a fresh name and in licensing the use of an existing name.  But if using another business' name make sure the rights and duties of both parties are clearly spelt out in writing from the outset to avoid downstream angst.

An edited version of this article appeared in the December 2013 issue of NZ Retail.