A thin cushion after scheduled debt service

Fictional Acquisition Companion example

This hypothetical uses invented facts and numbers. A fictional business produces £330,000 of annual cash available for debt service before financing payments. Its buyer is considering a £1.2 million senior loan with equal principal over eight years and a separate seller note requiring £48,000 each year.

Build the simplified first-year schedule

For this illustration only, calculate interest at 8% of the opening senior balance:

1. Senior principal: £1,200,000 ÷ 8 = £150,000.
2. Senior interest: £1,200,000 × 8% = £96,000.
3. Senior debt service: £150,000 + £96,000 = £246,000.
4. Add the seller-note payment: £246,000 + £48,000 = £294,000 total scheduled payments.
5. Remaining cash in this simplified schedule: £330,000 − £294,000 = £36,000.
6. Cash-flow coverage: £330,000 ÷ £294,000 = 1.12× (rounded).

The interest convention and all terms are assumptions for the exercise, not a market benchmark or a proposed financing package.

Decide what the remainder can support

The £36,000 is only the remainder after the listed payments. The case has not modeled taxes, capital spending, working-capital swings, fees or unexpected repairs. A buyer should check those needs and test weaker trading before deciding how much debt the business can carry. Continue with cash flow and debt service.