What Is ROI? How Buyers Should (and Shouldn't) Use It

Gain or loss over a period, expressed as a percentage of the original investment: (Current Value − Investment) ÷ Investment × 100. Doubling your money is a 100% ROI.

Why it matters: ROI gets thrown around loosely in business-buying conversations, and used carelessly it can make a mediocre deal look great or a good deal look unremarkable. A buyer comparing two acquisition opportunities needs to know the time horizon behind any ROI figure — a 100% return means something very different over one year than over ten — and should watch for a common mix-up where "ROI" is really describing payback period instead ("the ROI is 3.5 years" is a payback-period statement, not an ROI calculation). Because ROI doesn't account for inflation or the time value of money, it's a useful quick gut-check but not the tool to lean on for a real investment decision — that's where NPV or IRR earn their keep.

Example: A buyer puts $300,000 down on a business and it's worth $450,000 in equity three years later — a 50% ROI. Framed as "50% ROI," it sounds strong; framed correctly as roughly 14.5% annualized, it's a more honest — though still solid — way to judge the deal against other options.

Not to be confused with "Return of Investment," a distinct and far less common term — see Return of Capital.

Related terms: Multiple, Customer Acquisition Cost (CAC), Cash Flow