What's left after the loan payment

The short version

• What a business earns for its owner is not what you will take home. The loan payment comes first.
• Part of every loan payment is not a cost. It is you paying down the debt and owning more of the business.
• You still need a salary out of what is left, and the lender will test whether there is enough.
• Plan for cash after closing, not only at it. Payroll runs before customers pay.
• Do this arithmetic yourself before you make an offer. No listing will do it for you.

A worked example

Here is a wholesale bakery that sells to regional grocers. The numbers are an illustration.

Line	Amount
Price	$1,200,000
SDE, what the business earns for an owner	$340,000
Your down payment, 10 percent	$120,000
Loan	$1,080,000
Assumed rate and term	10.5 percent over 10 years
Annual loan payments	about $175,000
Left before your salary	about $165,000

The $340,000 in the listing becomes about $165,000 once the loan is paid. Your salary comes out of that.

That number is not in the listing. It is not hidden either. It is arithmetic nobody does for you.

The part that is easy to miss

About $65,000 of the first year's payments is not a cost at all. It is principal: you paying down the loan and owning more of the business. Do that for ten years and you own it outright.

Once the loan is paid off, the money that was going to the bank comes to you instead.

What the lender will check

The lender runs its own version of this. It deducts a salary for you, then tests whether what remains covers the loan payment at least 1.25 times. Lesson 3.4 explains the test.

In this example:

• With a $100,000 salary for you, coverage is about 1.37. It passes.
• With a $120,000 salary, coverage is about 1.26. It just passes.
• With a $140,000 salary, coverage is about 1.14. It does not.

The lender uses its own salary figure, its own rate and its own view of the earnings, so its answer may differ from yours.

Cash after closing

Closing takes most of your cash. Then the business needs some.

The bakery's grocers pay in about forty-five days. The flour and the wages went out weeks before. Many businesses work this way: costs come first, payment comes later.

In many sales this size, the money customers already owe goes to the seller at closing, not to you. You take on payroll from day one without the receivables that were meant to cover it.

None of this is a reason not to buy. It is a reason not to put your last dollar into the down payment. An SBA loan can include working capital, or a line of credit can sit alongside it. Lesson 3.1 covers both.

Ask for months, not years

Many businesses are seasonal. A bakery's year often leans on the fourth quarter. A heating company's cash builds in some months and drains in others. Ask for three years of results by month, so you can see when the cash comes and goes.