QSR FRANCHISE AVERAGE UNIT VOLUME (AUV)

Launching a new Quick-Service Restaurant (QSR) franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

From the perspective of a prospective new QSR franchisee, an understanding of the Average Unit Volume (AUV) for the particular Quick-Service Restaurant (QSR) franchise system that is being pursued is a critical metric for assessing the franchise's potential, with the determination being made from the calculation of the average annual sales revenue generated by a single operating unit across the franchise system.

How AUV is Determined for QSRs

The AUV is calculated using a straightforward formula: Total Annual Sales of All Units (Company-Owned and Franchised) divided by Total Number of Operating Units

Key Points on the Calculation of AUV

• Total Annual Sales: This figure represents the gross sales revenue from all operating company-owned and franchised locations over a specified 12-month period. "Gross Sales" typically includes all revenue from the sale of products and services, including delivery, catering, and sometimes other income related to the restaurant.

• Source: In the US franchise system, this data is generally found in Item 19 (Financial Performance Representation) of the Franchise Disclosure Document (FDD), which US-based franchisors are required to provide to prospective franchisees.

• What AUV is NOT: It's important to understand that AUV reflects revenue and is not the same as profit or profitability. A high AUV can be offset by high operating costs (like rent, labor, and food costs), resulting in a lower profit margin.

How Prospective Franchisees Should Assess AUV

Prospective franchisees should use the AUV as a starting point for their financial analysis, but they must look beyond the number itself to fully assess the opportunity.

A. Contextualize the AUV

• Check the Fine Print (FDD Item 19): Look closely at the footnotes in Item 19 of the FDD.

  • Included Units: Does the AUV include all stores, or just a select group (e.g., only franchised, or only those open for a full year)? Including new or temporarily closed locations can skew the average downward.

  • Definition of Sales: What is explicitly included in "Gross Sales"? Make sure the definition is clear and consistent.

• Compare Against the Industry: Research the AUVs of the brand's direct competitors in the same QSR sector (e.g., comparing one burger franchise to others). This provides a benchmark for the brand's performance.

B. Connect AUV to Profitability

Since AUV is just revenue, the real assessment requires estimating profitability by considering costs:

• Initial Investment: Compare the AUV to the initial investment range (found in FDD Item 7). A higher AUV might be less attractive if the initial start-up costs are disproportionately high. Calculate a potential Return on Investment (ROI).

• Operating Costs: Attempt to estimate key operating expenses to project a realistic net profit. You'll need to research or estimate:

  • Cost of Goods Sold (COGS): Food and paper costs.

  • Labor Costs: Wages, benefits, and payroll taxes.

  • Occupancy Costs: Rent, utilities, and common area maintenance.

  • Franchise Fees: Royalty (percentage of gross sales) and advertising fund contributions.

  • Note: While franchisors are legally restricted from providing guaranteed profit figures, you can often obtain expense ranges from existing franchisees.

C. Validate with Existing Franchisees

The best way to assess the AUV's reality is through validation. Speak with as many current and former franchisees as possible (contact information is provided in the FDD, typically Item 20). Ask them:

• Does the AUV in the FDD seem representative of their unit's sales?

• What are their primary operating costs (especially rent and labor) as a percentage of sales?

• How long did it take their unit to reach the average sales volume?

• How does the franchisor support them in driving sales (marketing, technology, supply chain)?

D. Evaluate Growth and Consistency

• Trend Analysis: Look at the brand's AUV over the last 3-5 years. Is it increasing, decreasing, or stagnant? Growing AUV suggests a strong, relevant brand.

• Same-Store Sales (SSS): This metric measures the revenue growth of stores open for more than one year. Strong SSS growth is a positive indicator of customer loyalty and successful menu/pricing strategies, separate from the sales generated by opening new locations.

• Geographic and Demographic Consistency: Ask the franchisor how the AUV varies by location type (e.g., urban vs. suburban, drive-thru vs. in-line) or region. A consistently high AUV across diverse areas indicates a more robust and replicable business model.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business (with a particular emphasis on the restaurant sector, given my prior background in the hospitality industry), together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.