We are two years away from a sale and our facility needs major technology upgrades. How do we balance the need to modernize our operations with the pressure to maximize our trailing twelve months of EBITDA for the valuation multiplier?

Question

Tyler Smith · Accepted Answer

This is a classic dilemma for businesses two years away from a sale. If you intentionally underfund capital investments to boost your short-term EBITDA, a buyer will likely identify this deferred maintenance during due diligence. This will lead to a discounted offer to cover those future costs. Conversely, if you invest heavily in unproven technology, you risk reducing your cash flow without any guarantee of a valuation increase.

The optimal approach involves focusing only on investments that offer a clear, immediate impact on efficiency or scalability. If a technology upgrade can directly reduce labor costs, decrease error rates, or increase capacity within 12 months, it's generally a wise investment.

Strategic Capital Expenditure

To navigate this challenge effectively, consider the following:

• Prioritize investments with direct impact: Focus on capital expenditures that demonstrably improve your recurring revenue capabilities. This could include automation that streamlines processes or technology that enhances customer experience, directly supporting an increase in sales or retention.
• Document the return on investment (ROI): Clearly document the expected and actual return on investment for all approved technology upgrades. This allows you to present these as an adjusted EBITDA add-back if the full benefits haven't materialized by the sale date. For instance, if an investment lowers operational costs, but the full impact isn't seen until after the trailing twelve months, good documentation can justify its inclusion in the adjusted figures. This is crucial for defending your valuation multiplier [defending AI investments in QofE EBITDA](/qa/defending-ai-investments-in-qofe-ebitda).
• Defer speculative projects: Avoid large, speculative investments that require a multi-year adoption phase or do not have a clear, short-term ROI. These can be perceived as risky by potential buyers and negatively impact your financial health leading up to a sale.

Buyer Perspective and Valuation

A buyer is looking for modern, functional infrastructure that does not require immediate, massive capital infusions post-acquisition. They want to see a business that is healthy, scalable, and ready for growth.

By maintaining a disciplined capital expenditure plan, you prove that the business is robust and poised for future expansion. This approach justifies a higher multiple on your maximized EBITDA, ultimately leading to a better sale price. This also contributes to proving your business is turn-key, which can help secure a [strategic premium multiple](/qa/operational-playbooks-for-strategic-premium-multiples) instead of just a financial buyer multiple.

Remember, buyers will conduct thorough due diligence, looking for hidden risks that could cause them to [walk away or renegotiate the price](/qa/identifying-operational-risks-before-buyer-due-diligence). Proactive and strategic investment planning mitigates these concerns.

Related questions

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• [We want to secure a strategic premium multiple instead of a financial buyer multiple. What operational playbooks do we need to document to prove our business is turn-key?](/qa/operational-playbooks-for-strategic-premium-multiples)
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