How can I afford taxes while paying on a SBA loan?

August 07, 2024

by a searcher from University of South Florida in Trinity, FL, USA

I currently have a LOI under consideration for a solid company that fits all my criteria and has great growth potential. Asking price is 4x. I will be seeking SBA financing. My SBA broker expects that I will be approved with 10% down.

Businesses are often purchased with a loan like this, but how does a buyer make loan payments and still afford income taxes and a salary?

Here are the numbers for my deal:
Purchase price: $2,200,000
Working capital to be included in loan: $100,000
Down payment on loan: $230,000

Interest rate: 11.5%
Term: 10 years
Monthly loan payment: roughly $30,000
SDE: $540000

Annually, I need $110,000 minimum for personal income. Being conservative, I am not assuming that SDE will remain at that level, so let's assume SDE is going to be slightly lower at $500,000. If SDE is $500,000, $360,000 in loan payments is paid each year, and $110,000 is used for personal income, we are left with $30,000.

The first year about $107,000 will go to principal, and maybe I can write off $35,000 through the business. So income taxes will be assessed on $107,000+$75,000=$182,000. In following years, this will only rise as loan payments become more principal and less interest. How can I afford taxes on $200,###-###-#### ,000 with only $30,000 left after loan payments and personal income??

Thank you for your time and help!

Reply by an intermediary
from University of Arizona in Denver, CO, USA

I'm a little surprised but see this recurring theme far too often. Why swing for the fences and set yourself up for a potential devastating life-long hole to dig yourself out of. Why not buy a quality business for $800,000 and grow it? Here's the thing, the only thing that really qualifies you (someone) for successfully operating a business is experience. Even if you have 20 years of corporate experience you will be humbled by the end of month one. You have to make all of the meaningful decisions on top of operating the business without any changes. There is no one else but yourself and you only. Friends, family, past colleagues, and the 'experts' at B-School may stroke you with support but at the end of the day they are not side-by-side with you. My advice is to not get over your skis, buy something that you can grow, stick with it, make the mistakes we all made, learn, grow, and when you have proven you can make it, sell it, and step up to a bigger business. I learned (painfully) many years ago that there is something worse than being broke: being broke and being in debt. It's a hole that can ruin your life forEVER. Oh, bankruptcy as a last resort? Nope, debts to the Treasury are not discharged. There is a reason that they don't through the keys to the 747 to someone who hasn't flown a twin-engine prop. There is an exceptionally fine line between self-confidence and hubris. Another recommendation is to stop tapping the community of Searchers or B-School instructors for guidance. Input and answers on questions you have are fine but go talk to 5 or 10 business owners and get their thoughts on the facts of business ownership and what they would have done differently. I think you will be better served, and will make a much better decision. Trust me, been there, done that, taken my lumps, and speak with wisdom. Wisdom: where knowledge and experience meet.

Reply by an investor
from Wright State University in Bellefontaine, OH 43311, USA

Simple answer is that it is that these size deals do not cash flow the best at 4x, 10% down and these interest rates.

Marc is correct in that depreciation will help reduce the tax bill and is certainly something you should model to see how much cushion you really have.

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