Dec 20, 2023·edited Dec 20, 2023Liked by Guesswork Investing
Hi, thanks so much for sharing - very helpful illustration for fellow searchers! If i'm looking at this correctly, i think there might be an issue in your calculations for the 4-6x multiple columns. It looks like you included the SBA guarantee fee for the 3x multiple but not for the 4-6x multiple in the 'total uses' calculation. Feel free to correct me if i'm viewing it wrong. The illustration still stands and is a very helpful guide for thinking about how to minimize risk in the transaction.
Oh you're totally right, that's an error on my part. Luckily doesn't change the overall math, but good catch. I'll update that when I re-write this post eventually.
If your SBA loan is 2,915K and it’s a 10 year ammort, wouldn’t year 1 principal payment be much higher than what you are getting. Shouldn’t it be around (2,915K/10) =~291K. How are you getting 218K? Just curious as I’m trying to replicate this simple model for myself.
No -- it's because it's structured as a mortgage. Each year, the payment per year is the same, but the amount allocated to interest goes down and the amount allocated to principal goes up, such that at end of year 10, the balance is zero. It's not 10 years of equal principal payments. In Excel, you can use the PMT (for total payment), PPMT (for principal payment), and IPMT (for interest payment) functions to calculate this.
Are you getting 218K because out of the 2,915K total loan 2,188K is SBA and and the rest ~700K is a seller note. And then the seller note is some standby seller note so year 1 ammort would only be (2,188K/10) = the 218K you’re getting. Just want to make sure I’m getting the logic and details that you used here correct. Thanks!
Sorry final 2 questions about this. Shouldn’t Capex not be tax deductible and come after pre-tax income.
And then shouldn’t the tax rate even at 277K be 35%.
Sorry about all these questions, my model that is built is getting different numbers and a different downside sensitive and I want to make sure I’m looking at this the correct way.
1. Capex is not tax deductible, but deprecation is. A lot of these assets get 80-100% accelerated depreciation in the first year for small businesses, so I made a simplifying assumption to just deduct it at 100%.
2. The tax rate for a pass-through entity is based on each individual investor's own income. If you choose to set it up as a corporation, then it'll be the corporate tax rate. But if it's pass-through, then each investor will have a different tax rate. I made a simplifying assumption of running it as the corporate income tax rate of 21%.
Thank you!! Unfortunately I don't have a great way to share Excel files (they have a ton of random noise built into them too, not really clean templates), so not able to do so, but hopefully you can reverse engineer most of it. The process of doing so will honestly help a lot in the understanding of the concepts.
Hi, thanks so much for sharing - very helpful illustration for fellow searchers! If i'm looking at this correctly, i think there might be an issue in your calculations for the 4-6x multiple columns. It looks like you included the SBA guarantee fee for the 3x multiple but not for the 4-6x multiple in the 'total uses' calculation. Feel free to correct me if i'm viewing it wrong. The illustration still stands and is a very helpful guide for thinking about how to minimize risk in the transaction.
Oh you're totally right, that's an error on my part. Luckily doesn't change the overall math, but good catch. I'll update that when I re-write this post eventually.
If your SBA loan is 2,915K and it’s a 10 year ammort, wouldn’t year 1 principal payment be much higher than what you are getting. Shouldn’t it be around (2,915K/10) =~291K. How are you getting 218K? Just curious as I’m trying to replicate this simple model for myself.
No -- it's because it's structured as a mortgage. Each year, the payment per year is the same, but the amount allocated to interest goes down and the amount allocated to principal goes up, such that at end of year 10, the balance is zero. It's not 10 years of equal principal payments. In Excel, you can use the PMT (for total payment), PPMT (for principal payment), and IPMT (for interest payment) functions to calculate this.
Are you getting 218K because out of the 2,915K total loan 2,188K is SBA and and the rest ~700K is a seller note. And then the seller note is some standby seller note so year 1 ammort would only be (2,188K/10) = the 218K you’re getting. Just want to make sure I’m getting the logic and details that you used here correct. Thanks!
Sorry final 2 questions about this. Shouldn’t Capex not be tax deductible and come after pre-tax income.
And then shouldn’t the tax rate even at 277K be 35%.
Sorry about all these questions, my model that is built is getting different numbers and a different downside sensitive and I want to make sure I’m looking at this the correct way.
1. Capex is not tax deductible, but deprecation is. A lot of these assets get 80-100% accelerated depreciation in the first year for small businesses, so I made a simplifying assumption to just deduct it at 100%.
2. The tax rate for a pass-through entity is based on each individual investor's own income. If you choose to set it up as a corporation, then it'll be the corporate tax rate. But if it's pass-through, then each investor will have a different tax rate. I made a simplifying assumption of running it as the corporate income tax rate of 21%.
Thank you for the clarification, appreciate it a lot
Another great article! Are you willing to share your excel file used in this article?
Thank you!! Unfortunately I don't have a great way to share Excel files (they have a ton of random noise built into them too, not really clean templates), so not able to do so, but hopefully you can reverse engineer most of it. The process of doing so will honestly help a lot in the understanding of the concepts.