Are Industry Benchmarks Lying to You? The Problem With "Average" Businesses
Owners keep asking how they compare to their industry average. Will, Alex, and Ian dig into where benchmark numbers actually come from, what they leave out, and why your own standards matter more.
The Short Answer
Use them as a rough direction, not a rule. The benchmark source most bankers and valuation professionals rely on, RMA's Annual Statement Studies, is built from financial statements that banks collect from their loan customers. So the data leans toward businesses that borrowed money, it leaves out the cash flow statement, it doesn't normalize owner pay, and it doesn't adjust for region. Many of the books behind it aren't accurate to begin with. A benchmark can tell you where to look. It can't tell you whether your business is healthy. That depends on your owner pay, your goals, and what you want the business to do for your life.
Where Industry Benchmarks Actually Come From
Will kept hearing the same thing on calls with owners: "I know my industry benchmark is supposed to be 40% gross margin." So before the episode he went looking for where those numbers come from. He did the research with an AI tool and says so openly, so treat the details as a starting point for your own digging.
The source most people call the gold standard is the Risk Management Association, or RMA, formerly Robert Morris Associates. It's a trade group of lending and credit risk professionals. Each year it publishes a large compilation of financial data: common-size financial statements and key ratios for hundreds of industries, organized by NAICS code and sorted by company size.
Here's how the data gets there. Member banks submit anonymized financial statements from their loan customers, mainly balance sheets and income statements. Alex summed it up on the show: banks send in the statements they collected when they made loans, and the result gets treated as what all businesses look like.
RMA's data was built to help lenders answer one question: will this business pay me back? That's a fair question for a bank. It's a different question from whether your business is profitable, pays you well, and gives you the life you want. RMA also sells this data through subscriptions and reports, so it has a reason to keep people interested in benchmarks.
Other benchmarks come from business broker sale data and from software companies that pool numbers from their users. Those have their own slant. Businesses that sell are often either struggling or have spent years dressing up their books for a high multiple. Software data depends on how carefully teams entered it, and that varies a lot from team to team.
Blind Spots in Benchmark Data
None of this means the people behind benchmarks are doing bad work. Collecting accurate financials from thousands of private businesses is hard. But you should know what's missing before you measure yourself against the result.
1. It only includes businesses with bank loans
The sample is companies that were creditworthy enough to borrow and are still operating. A $1 million contractor running on cash flow and a credit card has no chance of showing up. And as Alex pointed out, plenty of businesses borrow because they're short on cash, which is not the group most owners want to model themselves on.
2. There's no cash flow statement
The data relies on the balance sheet and income statement. A profit and loss statement doesn't show how much goes to debt principal each month or what the owners actually take home. That's a big part of the picture to leave out.
3. Owner pay isn't normalized
A contractor doing $2 million who pays himself $60K on W-2 and takes $200K in distributions looks far more profitable than one who pays himself $150K through payroll. The benchmark doesn't adjust for that, and owner pay is often the most important line for an owner.
4. Industry codes and geography blur together
Many businesses could file under several NAICS codes and just pick one. And a plumber in Salt Lake City and a plumber in Minneapolis share a code but not labor costs, material costs, or insurance.
5. The books underneath are often wrong
Alex estimates that around 90% of the businesses we talk with don't have accurate books (granted, people come to us because something's off). Even when the totals are right, few P&Ls break out direct labor or cost of goods sold in a consistent way, and that's exactly what owners use benchmarks to compare.
6. There's no story behind the numbers
A ratio tells you what margins looked like, not how the business got there, how it's funded, whether it has partners, or what the owner is trying to build. RMA itself notes the statements aren't selected randomly.
When a Benchmark Can Hurt You
Alex put it bluntly: benchmarks have created more stress in his life than they've relieved. The bigger risk is when an owner treats one as a rule.
He once worked with an HVAC owner whose ads were wildly profitable, close to a 10x return. The owner wanted to grow but wouldn't spend more on marketing because it was already 10% of his budget, and he'd heard you shouldn't go past 10%. He had a lever that clearly worked and wasn't pulling it because of a number someone else set.
Ian shared a pricing story. An owner changed their price to match a competitor down the road. When Ian talked to that competitor, it turned out they'd received a large inheritance, ran the business for fun, and were losing $10,000 to $20,000 a month. Copying them would have meant copying a business that wasn't trying to make money.
"Benchmarks can be useful directionally, but limiting specifically."
Alex Engar, co-founder of CEO Finance AcademyHow to Use Benchmarks Without Letting Them Run Your Business
We still publish benchmark ranges, like our guides to HVAC profit margins and plumbing company profit margins. Read them the way we do: as a reason to ask a question about your own numbers, not as a grade.
Good ways to use a benchmark
- As a starting point when you're new and have no history of your own
- To flag a line on your P&L that's worth a closer look
- To find ideas from businesses outside your bubble
- To understand how a lender or business broker may read your numbers
Ways it goes wrong
- Capping spending that's clearly working because of a percentage
- Matching a competitor's price without knowing their situation
- Deciding you're failing when you're healthy and paying yourself well
- Treating a single number as gospel without a range
If you plan to sell one day, benchmarks can come up, since many valuation professionals use RMA data. Will's take: they matter to the degree you can explain and defend your own numbers. If you know how the benchmark was built, you can push back when someone uses it against you. For more on what buyers look at, see what makes a business sellable.
Better Benchmarks: Your Goals and People Who Know Your Niche
Ian starts with a different question: what do you want this business to do for you? If you've been running it for three, five, or ten years, you should be setting your own standards. Sometimes he looks at the financials of an owner who feels behind and finds a healthy business that pays them more than they expected. A 40% labor target might be right for you if it gets you to your other goals. It might not.
Compare apples to apples
Before you compare, check the basics: same industry and size, same region, single owner or partners, how the business is funded, and whether the owner is building to sell or to run for life.
Learn from niche experts
Alex has internal benchmarks for cash-pay physical therapy practices, like what billing rate supports six-figure therapist pay. They came from years of sitting with those owners and noticing patterns, not from a survey.
Join a group of peers
Will has found more value in groups of owners with similar businesses sharing what works. It's a smaller, self-selected sample, but you get the story behind the numbers.
Want to Know What Good Looks Like for Your Business?
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Book a Free Intro Call Try the free profit margin calculatorFrequently Asked Questions
The source most bankers and valuation professionals use is RMA's Annual Statement Studies. Member banks submit anonymized balance sheets and income statements from their loan customers, and RMA compiles ratios for hundreds of industries by NAICS code and company size. Other benchmarks come from business broker sale data and from software companies pooling their users' numbers. Each source has its own slant.
They're useful as a rough direction but limited. The main data set only includes businesses with bank loans, leaves out the cash flow statement, doesn't normalize owner pay, and doesn't adjust for region. Many of the books behind the data are also inaccurate or laid out differently, so a ratio like labor percentage may not compare cleanly to yours.
Owners pay themselves in different ways. One owner might take a small W-2 salary and large distributions, which makes the business look very profitable. Another runs a full salary through payroll, which makes margins look thinner. Benchmarks don't adjust for that, so two businesses with the same real economics can look very different on paper.
Not just because a benchmark says so. On the show, Alex described an HVAC owner whose ads were returning close to 10 times their cost, yet he wouldn't spend more because marketing was already 10% of his budget. Look at whether the spending is actually profitable for your business before you let a percentage limit it.
Start with your own goals: what you want to earn, how you want to work, and whether you plan to sell. Then compare against businesses that truly match yours in industry, size, region, ownership, and funding. Advisors who work with your exact kind of business, and peer groups of similar owners, usually give more useful comparisons than a national average.
They can, because many valuation professionals use RMA data. But they matter mostly to the degree you can explain and defend your own numbers. If you understand how a benchmark was built and where it's skewed, you're in a better position to push back when a buyer or broker uses it to argue for a lower multiple.