Our financial reports look incredibly profitable because we have deferred several major technology upgrades and equipment purchases over the last few years. How will a sophisticated buyer calculate this deferred maintenance during due diligence, and how do we address it on our runway?

Question

Tyler Smith · Accepted Answer

If you try to inflate your profitability by deferring essential capital expenditures, a professional buyer will spot it immediately during due diligence. This is a common mistake that backfires because buyers do not just look at your current net profit, they evaluate the future capital required to maintain and grow those profits.

During due diligence, a buyer's engineering and operations teams will audit your physical assets, software systems, and technological infrastructure. If they find outdated systems or deferred maintenance, they will calculate a capital expenditure backlog. They will then subtract this estimated cost directly from your purchase price or use it to negotiate a lower EBITDA multiple.

To protect your deal, you must address this backlog on your exit runway. Work with your leadership team to create a clear capital expenditure plan. Align these upgrades with your quarterly Rocks to ensure they are systematically completed. This might include migrating legacy databases to modern cloud infrastructure or integrating AI tools to optimize your operational workflows.

My recommendation is to proactively address critical maintenance issues at least eighteen months before going to market. Presenting a clean, fully updated operational infrastructure with a clear CapEx schedule builds immense credibility and prevents buyers from using deferred maintenance as a tool to chip away at your valuation.