ROI and The Tax Multiplier

Two Useful Tools when Negotiating a Sale

The “ROI” Multiplier
The ROI Multiplier is a special formula to determine a reasonable asking price that an informed buyer is more likely to accept. It is based on the "bet" that he will accept a price that will give him a 30% ROI [return on investment]. The formula is presented below as a simple step-by-step worksheet. You are not bound to 30%, but it is a "streets smart" acceptable rate.

  1. Write down the total annual net profit. This is your starting point.

  2. Add up “soft expenses.” These are Travel, Entertainment, Vehicle Expenses and other expenses that though legitimate are more for your convenience than hard business necessity.

  3. Write down the total Mortgage Interest, Depreciation, and Amortization Expenses.

  4. Add step #2 amount and step #3 amount to the net profit in step #1. This is your adjusted net profit. It is the “real” profit.

  5. Divide this amount by 30%. This will give you an asking amount such that if the Buyer buys the business and operates on the same level as you did, then he should get a 30% return on his investment.

  6. You can stop here, but if you feel confident that you can get more, then I suggest these additional steps.

  7. If you are using a broker, subtract the commission from 100%. Divide the amount in step #5 by this percentage. The result will be an amount that will pay the commission. If you are not using a broker, go to step #8.

  8. If you are concerned about the loss due to income tax, find your average tax rate on the sale. You will really have to have your accountant work this figure out for you, but my experience that it usually works out to 30%. Subtract 30% from 100% to get 70%. Divide the amount in step #5 or step #7 by 70%. This will give you a sale price that will give you the amount you want AFTER taxes instead of BEFORE taxes.

The Tax Multiplier
You are in the middle of a negotiation and must accept or decline an offer, but you do not know how much you will loose in taxes. If you have not carefully calculated a tax multiplier, then use 70%. Multiply the offered price by 70%. If you have to do it in your head, multiply the price by the “magic number” 7 and take one-tenth of that number. That will be your AFTER tax take-away amount.

NOTE: When you DIVIDE a number by a percentage less that 100%, the result will be a larger number. 5,555 / 70% = 7,935.