An experienced advisor in mergers and acquisitions, Matthew Brunstrum works at Sun Acquisitions in Chicago, Illinois. In this capacity, Matthew Brunstrum is responsible for providing clients with a range of mergers and acquisitions services, including due diligence, valuation, and return on investment (ROI) assistance.
In business, ROI is the most common ratio used for gauging the profitability of a company or strategy. Calculating this ratio is seemingly very simple due to the basic ROI formula that most people use. This formula involves dividing the return of an investment by the cost of the investment. For example, if a business is purchased for $200,000 and grows to the point where it’s sold for $300,000 by the new owner, then they saw a return of $100,000. This, divided by the initial investment price of $200,000 is 0.50. Since ROIs are usually given as percentages, this amount is multiplied by 100 for a final ROI of 50 percent.
ROI calculations become more difficult when they are affected by multiple scenarios. With the above example, the investors most likely had to put money into the business they bought for $200,000 before they could grow it to $300,000 in value. If the investors put an additional $20,000 into growing the business, their total investment cost increases to $220,000. This would decrease the ROI to about 36 percent.
Taking profit out of the business also affects the ROI. Continuing with the scenario where investors put $20,000 into growing their new business, if those same investors took out $50,000 in profits before selling the business, the ROI would increase to 59 percent. This is because the $50,000 in additional profit would be added to the $80,000 difference between the initial investment and sale price.