Need help with a seemingly simple question.

[C69]

Hello,
I've found a well-established and profitable small business to purchase (through an investor). I have the owners personal income statement and waiting for the P&L and other docs. Please excuse my ignorance as this is my first small business I'm looking to operate/own. I'm going to be using an investor and will have to obviously repay the note. The investor wants 10%, which I think is fair for the amount (around $400k) he is lending. What is a normal length of terms; amortized over 5, 10, 20 years with a balloon payment at the end of 3-5 years? That's around $3860 a month/$46,320 a year (with 20 year amortization) to pay back the loan by my guesstamation. My ignorant question is: will that loan re-payment come out of the business income as an expense before I get paid or reap any of the profits (which if it does then i expect it to decrease my net income!?) OR do i pay that back from (my net income) based off the amount the owner gave me as their net income(which i would hope/speculate be near what my net would be also)? I'm trying to figure out if the business can/will support itself, my daily living expenses AND the loan payments. the scenario I'm looking at with the info i have right now is: owner annual net income:$81k, loan repayment: $46k which only leaves me $35k to live on a year...The concern i have with this is that i barely make it raising two kids on that $35k a year now as it is, and the fact that it will take 20 years to pay the loan off at that amount, and I don't know any investor who wants to wait around for that(matter of fact, my investor said he'd rather do a short term investment, I'm guessing 3-5 years). Another observation and question is: how does one pay the balloon at the end of the 3-5 years if the business can't support that lump sum when its barley able to satisfy the 20yr amortized amount?

So I'm by far not an accountant but it seems like my math and logic are in place, but I'm hoping I'm wrong because if I'm right, then I'm sad to say i don't think this business venture will work out for me...which leads me to the frustrating and defeated question of: if i don't have the $400k cash myself, then how do i start my own business like this!?

I appreciate ANY and ALL guidance and answers you can provide! Thanks in advance.

Signed,
Frustrated

[Executive Capital Finance]

I would suggest that if you have not already set up a deal structure with your investor, that you reconsider the proposed debt structure with one that more resembles an equity stake in the company. Debt to a brand new start up can spell death in 18 to 24 months as it will leave you in the position that you have described and are well aware of. Instead, you should propose an equity structure for a percentage of the net profits on a quarterly basis until either the investment is paid off or the investor is bought out down the road. Typically, equity investors would prefer to exit in a 3 to 7 year period and it's going to be expensive to buy them out. The good part is that down the road, the business is generating sufficient income to afford debt (because you can afford to pay it back from futures revenues) which can be accessed to buy out your investor. Rework your deal structure before you make a commitment that will cost you time and money and probably your business too.

[Paul]

An important consideration, perhaps the most important, is what potential does the business have to grow? If you feel it has reached its capacity then all you can ever hope for is to net out the $ 35,000. However, in some cases a realatively small increase in business can result in very significant incremental profits. This depends primarily on the margin. IE; if the business margin is 50% then increasing the business revenue by $ 70,000 would result in another $ 35,000 in net income. Then you have to determine what that additional revenue represents in growth. Is it 10% which is very possible or is it 40%, a much more difficult task. Remember the fixed expenses/overhead is already covered.

If you don't think you can grow the business then you are just "buying" a $ 35,000 a year job.

[jamesray50]

Your monthly payments come out of your cash flow, not gross or net profits. Loan payments are not an expense, only the interest portion of the payment. Set up a budget. How much guaranteed income will you have coming in monthly? What do you have to pay out monthly? What is the difference?