We generate strong EBITDA, but prospective buyers are discounting our valuation multiple because our annual maintenance capital expenditures eat up forty percent of our operating cash flow. How do we defend our valuation against heavy CapEx adjustments?

Question

Tyler Smith · Accepted Answer

Buyers do not value EBITDA in isolation; they value Free Cash Flow. When forty percent of your EBITDA is consumed by ongoing capital expenditures just to keep the lights on, your business behaves like an asset-heavy operation rather than a high-margin cash engine. Institutional buyers will lower their multiple or adjust their debt service assumptions because the actual distributable cash is thin.

To defend your valuation, you must clearly bifurcate growth CapEx from maintenance CapEx on your financial statements. Diligence teams assume all historical CapEx is mandatory maintenance unless you prove otherwise. Growth CapEx includes new production lines, specialized tooling for newly signed long-term contracts, and proprietary technology development that drives new revenue.

Audit your asset purchases over the trailing thirty-six months. Build a defensible schedule backed by project documentation, invoices, and your EOS Scorecard metrics showing how specific capital investments produced incremental revenue. Present this reconciliation to the buyer Quality of Earnings team early.

Next, audit your preventative maintenance program. Demonstrate that your equipment or infrastructure has a remaining useful life that exceeds industry benchmarks, supported by third-party appraisals or preventative maintenance logs. If you can show that future capital needs will taper off because past investments created surplus operating capacity, you eliminate the buyer rationale for a valuation discount.