This lesson is part of our free Franchise 101 course.
Average annual revenue is one obvious measure of a business’s success, and a valuable one. But it also has its limitations, and it’s important to bear these in mind when assessing a franchise.
The Benefits of Average Annual Revenue
Like any financial measure, annual revenue is a useful way of cutting through the hype around a franchise. A high-profile brand or strong presence in business reporting can sometimes disguise a franchise’s problems, or even be a reflection of the fact that it has peaked and is heading for decline.
Financial records are particularly useful for comparisons because everyone involved is using something resembling the same measures. There is no readily comparable measure of popularity, innovation, or brand appeal, but you can easily compare two sets of financial figures.
Revenue is particularly important because it gives you an idea of what a franchise might earn for you. Average annual figures mean that you’re not looking just at the best or the worst but getting an overview.
The Problems with Average Annual Revenue
That said, no measure is purely objective, and there are two significant problems you can face in using this figure.
First is the fact that not every franchise reports average annual revenue. They can have perfectly good reasons for doing this, but it’s still frustrating for potential franchisees, as it means you can’t use this measure on some franchises.
Secondly, there is no universal method for calculating the results, or even for deciding which locations are included in the averages. As the calculations might be done differently, the figures don’t give you a precise measure of who is doing better than who, just a rough idea of where they are compared with others.
Using Average Annual Revenue
Because of this, it’s important to use average annual revenue in context.
Don’t rely on it as your only measure. You’ll need others so that you can compare businesses that don’t publish this data, and to balance against flaws in the figures.
Don’t expect it to produce an exact hierarchy. If two franchises have similar results, you can’t use their averages to conclude that one is better than the other. On the other hand, if one has average revenues twice as high as the other, that shows a real difference.
Average annual revenue is a measure that paints in broad strokes, but that is still valuable. Look at the big picture, consider its limitations, and don’t get hung up on small differences that may be down to different measuring methods.