The Art and Science of Franchise Research: Revenue Size

Revenue Size

Why It's Important:

If you had a choice to earn $200k net profit from a business making $400k in revenue versus one making $1M in revenue, the $1M option usually wins if all other factors are equal. Here’s why:

• Diversification of Risk: More revenue usually means more customers. Losing one customer won't significantly impact your total revenue.

• Easier Staffing: Larger revenue allows you to hire full-time employees instead of part-timers, making it simpler to find, train, and retain good workers.

• Opportunities to Improve Profits: With higher revenue, there are more opportunities and flexibility to find ways to increase net profit.

• Greater Marketing Power: Higher revenue lets you spend more on marketing, attracting more customers and building your brand more effectively.

Advantages of Smaller Revenue with Higher Margins:

Sometimes, though, smaller revenue businesses with higher profit margins can actually be better. Reasons include:

• Simplicity: These businesses are usually simpler to operate, meaning less stress and easier management.

• Fewer Employees: Smaller operations typically require fewer staff, making managing people simpler and reducing overhead.

• Lower Operating Costs: High-margin, smaller revenue businesses typically have lower operating expenses, helping to reduce the impact of inflation and rising costs.

Risks of Having Lower Revenue:

With lower revenue, every missed sale or lost customer feels like a bigger hit. Each expense has a bigger impact on your business, making financial management tougher. New investments like marketing or additional employees become riskier since they eat up a larger portion of your revenue.

How to Mitigate the Risk:

If your business has lower revenue, it’s crucial to maintain higher profit margins. For example, if a $1M business has a net margin of 20%, a $500k business should ideally have margins of 25% or more. Smaller-revenue franchises usually have advantages like lower initial investment, simpler operations, and less reliance on complex sales and marketing tactics.

Also, if you’re planning to keep your day job or run the franchise part-time, a simpler business with fewer moving parts might outweigh the benefits of larger revenue. Simplicity can save you time, reduce stress, and still meet your financial goals if the margins are strong.

Conclusion

Ultimately, choosing the right franchise means balancing several factors based on your personal situation. Consider:

• How simple or complex you want the business to be (think about your available time and business experience).

• Whether the net margins will realistically help you reach your financial goals (verified by talking to existing franchisees).

• The number and type of employees you feel comfortable managing.

• Your preferred staffing model—full-time vs. part-time.

• How much money you're comfortable investing upfront.

The right choice always depends on your priorities, lifestyle, and business goals.