How to Calculate IRR and MoIC on a Business Acquisition

What IRR and MoIC actually measure

MoIC — multiple on invested capital — is the simplest return measure in acquisitions: total cash received divided by total cash invested. Put in £1m of equity and take out £2.5m over the life of the deal, and the MoIC is 2.5x. It says nothing about how long that took. IRR — internal rate of return — is the annualised rate that makes the money invested and the money returned equal once both are discounted back to the same point in time. A 2.5x MoIC over three years is a much better result than the same 2.5x over eight years, and IRR is the number that captures that difference; MoIC alone cannot.

Neither figure is more "correct" than the other — they answer different questions. MoIC answers "how much money did this actually make me". IRR answers "how good a rate did my money earn while it was invested". A buyer, a lender or an investment committee usually wants both, because a very high IRR on a deal that returned £50,000 of profit is a different kind of good news from a very high IRR on one that returned £2m.

Why IRR and MoIC can point in different directions

The two diverge most visibly around holding period and the timing of cash flows. A deal held for one year that doubles the equity shows a 100% IRR and a 2.0x MoIC — an extraordinary rate on a modest sum. A deal held for eight years that also doubles the equity shows roughly a 9% IRR on the same 2.0x MoIC, because the same multiple earned over eight years is a mediocre annual rate. Neither number is wrong; they are measuring different things about the same £1 in and £2 out.

A dividend or a partial recapitalisation part-way through the hold has the same effect: cash returned earlier is worth more to IRR than the identical amount returned later, even though MoIC treats every pound the same regardless of when it arrived. This is also why a buyer comparing two deals on IRR alone can be misled if one deal returns most of its cash in year one and the other in year five — the earlier one will usually show the stronger IRR even on a lower total multiple.

How to calculate MoIC

MoIC needs two numbers: total cash invested (the equity cheque at completion, plus any further equity injected later — a working-capital top-up, a bolt-on) and total cash received (dividends or distributions along the way, plus the net proceeds at exit after any debt still outstanding is repaid). Divide the second by the first.

The common mistake is using the enterprise value or the headline purchase price on one side of the calculation instead of the actual equity cheque. If a £4m acquisition is funded with £2.8m of senior debt and £1.2m of equity, the equity investor's MoIC is calculated on the £1.2m they actually put in, not the £4m the business changed hands for — leverage is exactly what makes a levered MoIC different from an unlevered one, and mixing the two bases produces a number that is not comparable to anything.

How to calculate IRR

IRR is the discount rate, r, at which the net present value of every cash flow in the deal — the initial investment as a negative number, every distribution and the exit proceeds as positive numbers, each in the year it actually occurs — equals zero. With a single cash outflow and a single inflow one year later, that reduces to simple algebra. With multiple flows across several years, which is the normal shape of a real acquisition, there is no algebraic formula that isolates r directly. In practice IRR is found by trial and error: try a rate, see whether the discounted cash flows sum to more or less than zero, and adjust — which is exactly what a bisection solver in a spreadsheet or a piece of software does automatically, narrowing in on the rate where the sum crosses zero.

Two things about that process matter in practice. First, a cash-flow pattern can occasionally have more than one mathematically valid rate that solves the equation, or no real solution at all — a solver that simply returns a number regardless is hiding that. Second, IRR assumes any interim cash distributed can be reinvested at the same rate the deal itself earned, which is rarely true and is one reason a very high IRR on a short, small deal should be read as directional rather than literal.

A worked example: a debt-funded SME acquisition

MoIC here is £5.2m of exit proceeds divided by £1.9m of equity invested — 2.74x. Solving the same cash flows (an outflow of £1.9m in year zero, a single inflow of £5.2m in year four, nothing in between) for the rate that sets their present value equal gives an IRR of approximately 27% per year. Compare that with the unlevered picture: if the same £5.0m purchase and £150,000 of costs had been funded entirely in cash with no debt, the equity invested would be £5.15m, and the same underlying business improvement — sold at £6.8m with no debt to repay — returns £6.8m against £5.15m invested, an MoIC of 1.32x and an IRR of roughly 7% per year over four years. The business did exactly the same thing in both cases; the leverage is the entire difference between a 7% and a 27% annual return to equity.

What actually moves IRR

Four levers dominate, and it is worth being clear that only one of them reflects the business getting better.

This is why a buyer reviewing a projected IRR should ask which of the four is doing the work. A deal that hits its target IRR mainly through leverage and holding-period assumptions is a much more fragile plan than one where most of the return comes from growing the earnings the business is sold on — leverage cuts both ways, and a business that underperforms while carrying debt service obligations can turn a levered IRR sharply negative in a way an all-cash deal cannot.

Net vs gross returns, and the carry waterfall

Every IRR and MoIC figure above is "gross" — before any performance fee the capital provider pays to whoever structured and ran the deal. Where a deal is backed by outside investors under a carried-interest arrangement, the return they actually receive is net of that carry, and a proper waterfall pays back invested capital first, then a preferred return (a minimum hurdle rate the capital is entitled to before anyone earns carry), and only then splits the remaining profit between the capital and the carry. Applying a flat percentage straight to gross profit, rather than running that sequence, systematically overstates what the deal sponsor earns and understates what the capital actually nets — the two are not the same calculation and do not give the same answer except by coincidence.

Common mistakes

• Comparing IRR across deals with very different holding periods or risk without also looking at MoIC. A 40% IRR on a one-year, £50,000-profit deal and a 22% IRR on a five-year, £2m-profit deal are not straightforwardly ranked by the IRR alone.
• Calculating MoIC or IRR on the enterprise value or purchase price instead of the actual equity invested. Leverage only shows up correctly when the denominator is the equity cheque, net of what was funded by debt.
• Forgetting transaction costs and any further equity injected mid-hold. Both increase the true amount invested and are routinely left out of a quick back-of-envelope return calculation, flattering the result.
• Modelling the exit at the entry multiple without stating that assumption. Whether the model assumes flat, expanding or contracting multiples materially changes the answer, and a projection that does not say which it assumed is not really comparable to another that made a different silent assumption.
• Treating a solved IRR as certain rather than as one point on a range. A structure with an earn-out, a vendor note or variable debt paydown has a genuine range of outcomes; presenting the base case as "the" IRR hides that.

How TrueValue calculates IRR and MoIC

The deal economics engine runs the actual structure a buyer configures — the consideration (cash, deferred instalments, an earn-out, a subordinated vendor note), the funding stack, transaction costs and the working-capital movement the business will absorb — and solves IRR with a bisection solver that returns a null result rather than a number it cannot stand behind, instead of forcing an answer onto a cash-flow pattern that does not resolve cleanly. Where outside capital and carried interest are part of the structure, net returns run through a real carry waterfall — capital back, then a preferred return, then carry on what is left — rather than a flat percentage applied to gross profit. Leverage, exit multiple, holding period and EBITDA growth can each be flexed and the levered and unlevered IRR compared side by side, on the same deal record the enterprise value and the funding plan already sit on, so the return a committee sees is struck on the same numbers as everything else in the memo.