Prospective buyers calculate our valuation based on EBITDA, but their investment committee evaluates us on unlevered free cash flow. How does distinguishing growth CapEx from maintenance CapEx prevent a buyer from discounting our headline multiple?

Question

Tyler Smith · Accepted Answer

EBITDA is the standard headline metric used to negotiate purchase prices, but institutional buyers do not fund transactions with EBITDA. They fund acquisitions with free cash flow. If your business requires regular capital investments in equipment, vehicles, hardware, or internal software development to keep operating, an investment committee will deduct those expenditures directly from your earnings when modeling their investment returns.

If you present all capital expenditures in a single bucket, a prospective buyer will assume every dollar spent was required simply to maintain your current revenue. They will subtract that total from your EBITDA, which lowers your implied cash generation and justifies a lower headline valuation multiple.

To stop this multiple degradation, bifurcate your historical CapEx ledger into maintenance and growth categories:
- Maintenance CapEx includes the bare minimum capital required to replace worn-out machinery, refresh essential workstations, or maintain current operational efficiency.
- Growth CapEx includes capital deployed specifically to open new facilities, develop revenue-generating proprietary tools, or onboard new client capacity.

Document this distinction clearly inside your data room. When you demonstrate that seventy percent of your historical CapEx was discretionary capital allocated toward scaling the business rather than preserving the status quo, the buyer must treat that spending as growth investment rather than an ongoing cash drain. This protects your adjusted free cash flow and preserves your target EBITDA multiple.