Paying loan back through business.

Discussion in 'Askaboutbusiness' started by rupert7, Dec 9, 2016.

  1. rupert7

    rupert7 Frequent Poster

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    I am looking to buy a business and taking out a substantial bank loan to do so.
    Rather than paying the bank loan back personally is it possible to take the loan out in the name of the business and pay the loan back as part of the expenses of the business?
     
  2. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Google "leveraged buy-out" or "Malcolm+Glazer+Manchester+United" and call me in the morning...
     
    rob oyle likes this.
  3. Joe_90

    Joe_90 Frequent Poster

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    If you set up a company and the company buys the shares/business and borrows the money then the company can pay back the loan out of 12.5% profits.
     
  4. Bronte

    Bronte Frequent Poster

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    I would imagine the bank will also require you to sign a personal guarantee.
     
  5. rupert7

    rupert7 Frequent Poster

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    Thanks for all the replies.

    Just to confirm.

    Business has turnover of £1,000,000.
    GP 400,000
    NP 90,000
    NP after 12.5% tax 80,000



    Sale price 500,000
    New Business Ltd acquires shares of company and takes business loan out for 500,000
    Repayments over 180 months are €5500 per month or €67,000 a year.

    This €67,000 can come from the €80,000 net profit???
     
  6. Rory_W

    Rory_W Frequent Poster

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    There is legal stuff that you need to do under the Companies Act 2014 - google Summary Approval Procedure. Once this is done then NewCo can acquire the shares of ExistingCo where financial assistance is provided to NewCo by ExistingCo e.g. security for bank loan given to NewCo
     
  7. cremeegg

    cremeegg Frequent Poster

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    The interest on the loan comes out before tax. The capital repayments after tax.

    Just a tangential question. Is the €80k profit after tax, after charging a salary for you. Will you have to work full time in the business. ?
     
  8. rupert7

    rupert7 Frequent Poster

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    Oh, didn't know that about the differentiation between interest and capital.

    Yes, my salary is included in the expenses and I will have to work there full time.
    I have years of experience in the sector.
     
  9. T McGibney

    T McGibney Frequent Poster

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    If you're investing a substantial sum in a business, you need proper professional advice. The issues are far too layered and complex for proper consideration on an internet site like this.
     
  10. cremeegg

    cremeegg Frequent Poster

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    I am inclined to agree. No disrespect, but you seem to be out of your depth on the financial aspects of this, and it is a huge commitment.

    If the €90k profit is AFTER your salary, this seems expensive, if it is before your salary, then you seem to be significantly over paying.
     
  11. rupert7

    rupert7 Frequent Poster

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    I completely agree. I will be enlisting the help of a chartered accountant who has over 10 years experience dealing with sales of business in this sector. I just looking to get as much info as possible myself first.
     
  12. rupert7

    rupert7 Frequent Poster

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    I would be very interested in finding out how these figures compare to other industries.

    In general the business could sustain a director's salary of around 6 or 7% of turnover or in this case around £70,000. This is accounted for in the expenses part of P&L so is taken into account before we are left with the £90k net profit.
    Businesses are selling approx x5 of ebidta but that varies depending on other details.

    I would love to know how that compares to business's in other sectors as I would consider buying a business outside of my comfort zone.
     
  13. cremeegg

    cremeegg Frequent Poster

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    The going rate for a business sale is notoriously difficult to pin down. There are of course exceptions, the right person in Musgrave's can tell you to the €1,000 how much a convenience store will make, but that is an exception. Generally however no one is an expert on this. Your chartered accountant with 10 years experience, well how many arms length sales a year has he been involved with, 1 or 2 ? And business sales in 2010 were a very different beast from sales today.

    A guaranteed income stream of €90k before tax is worth a lot more than €500k obviously. However nothing in business is guaranteed. At the end of the day you probably know more about the risks involved than anyone.

    There used to be a type of analysis called downside analysis, in cases like this. It is seen as less accurate than NPR calculations and so not written about anymore but I think in this case it would be very useful.

    If things went wrong, turnover fell, margins came under pressure, new competitors entered the market, a new business model undermined the business. What would the effect be and what would the downside be. Is any investment going to be needed in the business over the next 15 years. With the loan it might be difficult to finance that.

    15 years is a long time for a business loan, is there a property involved. Lots of things could go wrong in 15 years. The profits, after salary at €90k, are 9%. Well I would expect that a business with an expected 9% net profit, could occasionally have a bad year and return a 3% profit. How would you be able to cope with that.

    Have you got personal assets. You might want to isolate these from the business risk. This often amounts to putting your home in your wife's, child's, parent's, sibling's name.