Introduction
Big ROI numbers sell dreams.
And in the world of business buying, those dreams are often packaged with just enough math to feel credible—but not enough to be accurate.
In this post, we’re breaking down how ROI gets inflated and misrepresented, using a real example from a popular entrepreneurial book. By the end, you’ll know exactly how to spot the difference between a great deal… and a great sales pitch.
Watch the breakdown here:
https://youtu.be/74ISnsgtwlM
The Seduction of High ROI
Let’s start with the example presented in the book:
- Seller’s Discretionary Earnings (SDE): $216,000
- Valuation Multiple: 3.2x → Purchase Price: $691,000
- Additional Costs:
- Inventory & working capital: $200,000
- Closing costs: $50,000
- Total Acquisition Cost: $941,000
Now here’s the hook:
- Down Payment: 10% = $94,120
- The rest is financed via an SBA loan
The author claims this deal produces a 229% annual ROI.
Sounds incredible, right?
That’s exactly the point.
ROI vs. ROE: The Trick Most People Miss
Here’s where things start to fall apart.
That 229% figure isn’t actually ROI (Return on Investment)—it’s ROE (Return on Equity).
In plain terms:
- ROI = return based on the entire deal cost
- ROE = return based only on your cash invested
By focusing only on the $94,120 down payment, the calculation conveniently ignores the $847,000 in debt.
When you calculate ROI properly—using the full $941,000—the return drops dramatically to around 12%.
Still decent.
But nowhere near 229%.
The “Return” Illusion
It gets worse.
The example treats SDE as if it’s pure profit.
But SDE includes the owner’s salary.
So part of that “return” is actually just pay for your time and effort.
Let’s normalize it:
- Subtract a reasonable owner salary: $100,000
- Remaining EBITDA: $116,000
Now layer in reality:
- Estimated annual SBA loan payments: $120,000
That means:
👉 The business is now operating at a loss
And that’s before:
- Taxes
- Reinvestment
- Repairs
- Unexpected problems
This isn’t passive income. It’s a tightrope.
The Risks of Overleveraging
This deal highlights several classic traps:
1. Overpaying
A 3.2x multiple plus inventory and working capital pushes the total price beyond what many industries justify.
2. No Margin for Error
Even a small dip in revenue could make debt payments unmanageable.
3. No Safety Net
Without reserves, any surprise expense—equipment failure, staffing issues, economic shifts—can derail everything.
This is what overleverage looks like in real life:
high pressure, low flexibility, and very little room to recover.
Why This Gets Marketed as “Easy”
Because it works.
These kinds of examples are designed to appeal to newer buyers:
- Big returns
- Low upfront cash
- “Financial freedom” narrative
But running a business isn’t a spreadsheet exercise.
It requires:
- Operational skill
- Financial discipline
- Realistic expectations
And none of that shows up in a hyped ROI calculation.
How to Protect Yourself
If you’re thinking about buying a business, here’s how to stay grounded:
Understand the Numbers
Don’t stop at SDE. Focus on normalized EBITDA and actual cash flow after debt.
Question Big Claims
Extraordinary returns deserve scrutiny. Always ask: what’s being left out?
Invest in Your Education
Learn how financing, valuation, and cash flow actually work—or work with someone who does.
Keep Cash Reserves
A good deal should survive bad months. If it can’t, it’s not a good deal.
Conclusion
Buying a business can be a powerful path to financial independence—but only if you approach it with clear eyes.
Flashy ROI figures are often more about marketing than math.
The real winners in business acquisition aren’t chasing hype—they’re making disciplined, informed decisions based on reality.
If you can do that, you’re already ahead of most buyers.Check out my book:
21 Stupid Things People Do When Trying to Buy a Business
Join my email list here:
https://www.DavidCBarnettList.com
Cheers,
Dave
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