£1m earnings, £150k left before other cash needs

The situation

The source illustrates a £3.5m purchase funded by £2.5m bank borrowing, £0.5m equity and £0.5m seller finance. Assumed annual earnings are £1m. Bank principal is repaid evenly over five years, the example uses 10% first-year interest on the starting balance, and seller payments are £100k annually. This is a hypothetical model, not a disclosed loan agreement. Watch source

Calculate the first-year burden

1. Bank principal: £2,500,000 ÷ 5 = £500,000.
2. Simplified first-year interest: £2,500,000 × 10% = £250,000.
3. Seller repayment: £100,000.
4. Total illustrated payments: £500,000 + £250,000 + £100,000 = £850,000.
5. Earnings less those payments: £1,000,000 − £850,000 = £150,000.

Those payments consume 85% of the assumed earnings. This is the source’s annual simplification; actual interest depends on when principal is repaid and how the contract calculates accrual. Its spoken benchmark-rate explanation is flagged as questionable in the research, so the 10% input is retained solely as an assumption, not a current rate quotation.

Interpret the remainder

The £150k is not demonstrated free cash flow or a safe dividend. Tax, capital expenditure, working-capital changes and other costs have not been reconciled. It also assumes the £1m earnings survive the ownership change. A business with apparently substantial profit could have little room for a new executive or a delayed project payment after financing demands.

Next, turn the annual illustration into a monthly cash schedule using consistent earnings definitions and the actual loan terms. Do not call £1m divided by these payments the lender’s contractual coverage ratio unless its numerator and included obligations match. Continue with cash flow and debt service.