Hello all. I'm hoping for some Mustachian-tinted advice on an LBO I'm involved in.
I bought into a business as a 10% owner for $255,000. It was leveraged (personal note with the previous owner: 6yr @ 4%, $60k down, remaining payments delayed one year, no early payoff penalty)
I've been making quarterly payments ($9,459) on the note. These quarterly payments are made via a distribution from the company to myself. After which I pay the personal note. The favorable interest rate on the note coupled with the favorable tax rate on distributions makes me think I ought to just hold the course.
However, at this current stage of the loan ($155,111 remaining) if I did one year of additional payments ($37,836) in a lump sum, it would save me $5,726 in interest. Which is a pretty nice return. Additionally, the company will continue to make these distributions through the pre-determined note length... so, since I will owe nothing in the final year of the note, barring a terrible turn of events in the company, this $37k will be "paid back" during the final year of the note.
I understand that paying the $37k now will be in after tax dollars... and the opportunity cost of doing so might in fact higher than the gain... however with the "return of funds" in that final year, it has me thinking...
To pay off the remainder of the note completely would result in only another $9400 in interest savings... Clearly making the opportunity cost too high, IMO.
Personally, having this debt hinders my enjoyment of life and this job. Having these note payments dependent on my work also adds stress. And there is a small worry that the company would shed this distribution if/when times got hard in the business. Which makes me think I should keep the cash around to continue to make the note payments if needed.
We don't need the cash for anything other than to use in ER... which is still 3-5 years off.
Typing this out has helped organize my thoughts on the matter. I appreciate any input you helpful souls may have.
P