Cash Flow/Phantom Income Due To Loan Amortization

[Mike from Pok.]

I am about to acquire a small business using an SBA loan. I am trying to plan out how to deal with the consequence of loan amortization. The loan will be an 18 year loan.

The purchase price will be allocated to real property (land and warehouse improvements), equipment, inventory, intangible assets (certain exclusive supplier contracts) and goodwill.

The issue is that the real property allocation has to be amortized on a 39 year schedule, and exludes the portion allocable to land. This will create an "deficit" between income and cash flow -- i.e., I will need to pay cash to amortize the loan, but at some point that principal amortization payment will exceed the aggregate amount of depreciation and amortization, and will be income that will incur tax. But I will not have cash to match the income, because it will have gone to amortize the loan.

Has anyone dealt with this issue? What are some solutions>

Thanks,
Mike from Poughkeepsie

[CFO to Go]

It is normal to have a difference between income and cash flow. In fact, I think many new businesses worry too much about the income statement and not enough about the cash flow statement.

Hopefully in 18 years your business will be making enough money that it won't be a problem paying the taxes. Also, many new businesses incur losses the first few years which can be carryied forward to offset future profits.

But when you do your strategic long term planning, make sure you plan for cash flow as well as profits.