10 Jun 2020
Words
Paul Mueller
Why ROI Is A Key Performance Indicator In Management Rights
Today, I want to talk about return on investment or ROI and multipliers. Generally, when you meet up with your broker to discuss listing or getting a market appraisal, the first question that always comes up is the multiplier. Where does my business sit, multiplier-wise? We at ResortBrokers feel the far more important number, which is not used a lot now in the industry, is the ROI or return on investment.
The ROI is a very important key performance indicator. It's commonly used by commercial businesses to determine the profitability of an expenditure and it's exceptionally useful in measuring success over time and taking the guesswork out of making future decisions. The other primary reason for the importance of return on investment, is that people invest in, or purchase, businesses to make money. So the return on investment is a measure of efficiency in converting your business investment into profit. This is why the return on investment is more critical than the multipliers, especially to someone returning to the industry or a newcomer.
The word multiplier may sound foreign to them and they won't really understand the term. Or perhaps if they've been out of the industry for a while, they won't understand where the multipliers sit, yet everybody understands return on investments. How we arrive at return on investment number is to take the net income and divide it by the total price of the business, plus the manager's real estate.
For example, a business netting $200,000 selling for $1.4 million, return on investment would be 14.3 percent. So if I had $1.4 million in cash and purchased that business, it would return 14.3 percent per year.
All of this might sound great, but I guess the question is, where does my management rights business need to sit ROI-wise to sell? What we're seeing in the market on the Gold Coast today is that the sweet spot is 13 percent or higher.
There's one example where we wouldn't use the ROI and we'd use the multiplier. For example, if we took that same net of $200,000 and made the manager’s real estate over a million dollars, of course, that would be impossible to reach that ROI number. This is where we'll use multipliers to show that the business is not overpriced and sits within the current MR business price for the Gold Coast.
If you're interested in the market appraisal or thinking of selling, please feel free to give me a call. I'd love to have a chat.
Paul Mueller
0439 255 507
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