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Paying Down Debt Question

Discussion in 'Accounting, Tax & Legal' started by timwest, 7th Feb, 2017.

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  1. timwest

    timwest New Member

    Joined:
    7th Feb, 2017
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    Location:
    Sydney
    Hey Guys,

    I am about to purchase an existing franchise.The structure that will be put in place is as follows; 50% of the Company will be owned by the franchisor the other 50% will be owned by my company which is the trustee for my discretionary family trust. I will be loaning the money to the trust for the purchase and have an agreement in place between myself and the trust.

    When looking at the financials of the existing franchise, I noticed that the franchisee was paying down the original capital required to buy their 50% share of the new franchise as debt with the free cash amount to pay off the debt faster. Once the debt was paid off they then got quarterly distributions of net profit which was substantially lower.

    Since we are not starting the business from new and will be buying the shares off the original franchisee can we do the same thing and pay our capital debt down with the free cash amount or do we have to pay our debt off with the net profit distributions?

    Forgive me for only knowing a limited amount as I am new to this type of investing and am learning along the way. I will be going over this with the franchisor but want to know as much as possible so I don't have the wool pulled over my eyes.

    Appreciate any help :)
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Are you sure that's how it's structured? It would be unusual for your trustee to "own" the shares. Surely the shares are held in trust? I'm hoping it's just a poor choice of wording? :D

    Ownership would typically be "Your Trustee Company Pty Ltd ATF Your Trust" ... where Your Trustee Company Pty Ltd doesn't actually "own" the shares, it merely holds them in trust for the benefit of the beneficiaries of the trust.

    I'm not sure I understand what they are doing? What do you mean by "free cash" ? Can you explain in a bit more detail?

    Oh, and welcome to InvestChat - great to have you here!
     
  3. Terryw

    Terryw Well-Known Member

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    How is 'your' trust getting its money into the company?