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What return does this business earn on its price? The yearly return, however you pay for it.
See the yearly return a business generates on its full purchase price, and the valuation multiple that implies.
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Business Calculators / ROI Calculator
ROI Calculator
Yearly return on the full price.
Asking price / cash flow (SDE).
Most small businesses sell for about 2x to 4x earnings, varying by industry. Compare a listing with its industry in the Business Benchmark Calculator.
How it is calculated
Related
The Cash-on-Cash Calculator measures your return on just the cash you put in when you finance, and the Debt Service Coverage Calculator checks whether a lender would fund the deal.ROI here is an unlevered, pre-tax measure of one year's earnings against the price. It leaves out financing, taxes, growth and any proceeds from a future sale. Not financial advice.
Return on investment (ROI) measures the yearly earnings a business generates as a share of what it costs to buy: the full purchase price, regardless of how you finance it. It is the quick check buyers use to compare opportunities and to sense-check an asking price before digging deeper.
Enter the asking price, the business's cash flow and a market wage for whoever runs it. The calculator shows your yearly ROI next to the valuation multiple the price implies, the price to cash flow multiple buyers and brokers use to talk about what a business is worth.
Questions
ROI Calculator: frequently asked questions
What is ROI, and how is it calculated?
ROI is a business's yearly earnings as a percentage of what it costs to buy: Net Return / Total Investment x 100. Here the net return is cash flow after a market wage for whoever runs it, and the investment is the full price plus any extra costs.
How is ROI different from cash-on-cash return?
ROI looks at the whole price, as if you paid cash. Cash-on-cash looks only at the cash you put in when you finance, after loan payments. Financing usually raises cash-on-cash and adds risk.
How does ROI relate to the valuation multiple?
They are two views of the same price. A business bought at 3x adjusted earnings returns about 33% a year; at 4x, about 25%.
What is a good ROI when buying a business?
Small businesses commonly return 15% to 30% on the price, more than public stocks or real estate, because they carry more risk and need your work.
Why subtract an owner replacement salary?
Your time has a value. Subtracting a market wage separates what you earn for working from what you earn for owning.
Does ROI account for growth, taxes or a future sale?
No. It is a single year, pre-tax snapshot. Growth and a future sale add to the real return; taxes reduce it.
Should I include inventory in the investment?
Yes, if you pay for it on top of the price. Add it, along with any other costs of the purchase, as additional investment.
Is a high ROI always a good sign?
Not always. A very high return can mean the price reflects real risk: falling revenue, one big customer, or earnings that will not survive the sale.
Is this financial advice?
No. It is an educational estimate.
Next Step
Put these numbers to work on a real deal.
Buyer's EDGE is free: save target businesses, model each deal in the Acquisition Center and learn the process in Acquisition Academy. Selling? The Seller Portal starts a confidential sale. Either way, an EDGE advisor can help from the first conversation through closing, financing included.