Return on investment is the time it takes to recoup the money spent.  If it takes 2 years you are effectively getting a 50% annual return on your investment. ROI is one method used to determine the price of a business. 

Return on Investment is calculated on the adjusted net profit of the business divided by the total purchase price. For example a business that has an adjusted net profit of $100,000 and the current accepted ROI range is 30%-50%. At 30% it would take 3.3 years to recoup your purchase cost, at 50% it would take 2 years. Calculate the ROI as follows:-  

The total purchase price for this business including Goodwill, Plant & Equipment and Stock is between $200,000 and $333,000. 

Many factors influence where a business actually fits in this scale. These can include location, number of years established, length of lease, owner involvement, staff, contracts, competition etc. 

As a rule, the stronger the business type, the lower the Return on Investment. 

For example, corner deli/convenience stores are under pressure from service stations who are now stocking all the traditional delicatessen lines and major supermarkets and shopping centres now operating 7 days. Buyers who may have been prepared to accept a 50% return (2 Years)  on this type of business some years ago now want their investment back in 1 year or less. A 100% or more  ROI

Some accountants use a general rule of a Return on Investment over 2.5 years.  (40%) 

Business prices are normally calculated using sales data for similar businesses, considering current market demand and the prevailing economic climate.   ROI is generally applied to businesses with a value of up to 1 million.

Please note that this information is of a general nature only. Buyers and Sellers are urged to seek independent financial and legal advice when buying or selling a business.

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