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How to compare ROI?

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Kokaka

Bronze Contributor
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Aug 9, 2019
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Hi all.
So a question just came to mind.
What is considerd a good ROI when building or buing a business.
Like

5%Poor
20%Good
50%Great
100% Outstanding

So if you invest 100k you will recieve
105k
120k
150k
200k
/Year

Anyone has some ideas?
 
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Eudaimonium

Contributor
Jun 8, 2017
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Germany
If you invest 100K into a new business and it starts to profit 200K per year, the ROI is something like 500-1000% as the business would now be worth a multiple of 200K.

A good ROI in general is anything that beats inflation, preferably offering more upside and less risk than traditional investment vehicles (stock/real estate markets for example)
 

Kokaka

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Aug 9, 2019
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If you invest 100K into a new business and it starts to profit 200K per year, the ROI is something like 500-1000% as the business would now be worth a multiple of 200K.

A good ROI in general is anything that beats inflation, preferably offering more upside and less risk than traditional investment vehicles (stock/real estate markets for example)
Aha thanks. I think I get it.
So if I invest 100k and get 100k profit each year. I have to multiple the profit by 3-5 which yealds 300-500%?
 

Kevin88660

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Hi all.
So a question just came to mind.
What is considerd a good ROI when building or buing a business.
Like

5%Poor
20%Good
50%Great
100% Outstanding

So if you invest 100k you will recieve
105k
120k
150k
200k
/Year

Anyone has some ideas?
ROI is not a useful concept when it comes to bootstrapping small business. Because the result is binary, either you make it a super high roi or negative. There is no in between.

Just like MJ can write a book the sales can range from very miserable to millions of copies.

More useful concept are like risk reward. How much money and time does it cost you if you fail and how much could you make if things go well.

Another factor to consider is relative skill and resource match to the project you intend to work. Higher match means higher probability (no guarantee) of success.
 
Last edited:

Eudaimonium

Contributor
Jun 8, 2017
87
98
115
Germany
Aha thanks. I think I get it.
So if I invest 100k and get 100k profit each year. I have to multiple the profit by 3-5 which yealds 300-500%?
Yes, if you manage to sell it for that multiple, but there is no straight answer. It may be very hard to sell your share of the business. It is not a liquid asset. Tax effect may also be worse than when simply collecting your share of the profits.

The multiple of course depends on the industry, if the business is growing, future potential, and how gullible the buyer is.

If the business depends on you to make profit or you put a lot of unpaid work in it, the multiple is 0, or low, because a new owner may not be able to operate it profitably. Likewise if the business is easily replicable, based on a recent trend, or has few real assets or brand of value.
 

Cameraman

Contributor
Read Rat-Race Escape!
Sep 25, 2021
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UK
Hi all.
So a question just came to mind.
What is considerd a good ROI when building or buing a business.
Like

5%Poor
20%Good
50%Great
100% Outstanding

So if you invest 100k you will recieve
105k
120k
150k
200k
/Year

Anyone has some ideas?
You can't just pick a ROI figure and say that it's good or bad. You need to use it to compare different investments along with the level of risk for that investment. If you have 100k to invest for a year and one returns 10% but the other 100% you might consider the 100% return better.

But what if the risk of losing your 100k is 99% in the second investment but 0% with the first. Then the return of only 10% looks the better of the two.

Something else that gets overlooked when considering a ROI figure is the payback profile. What if your investment was over a 5 year period and you only get the return in year 5. That may not be as attractive as an investment where you make 20k each year for 5 years. Money now is often better than money later for lots of reasons.

As someone else said, it's not a good way to look at bootstrapping a business. MJ's CENTS model (and others he suggests) are much more helpful.
 

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