I've been looking at asset heavy (CNC Machines) manufacturing businesses to acquire. For one of the businesses in particular, I see that the seller is buying a lot of equipment that essentially wipes out the profit in the business for the last 3 years (i.e. 20% of revenue spent on CAPEX for last 3 years which is about equal to adjusted EBITDA) I'm told this was to add capacity in the business and upgrade aging equipment but my feeling is that it was primarily for tax purposes since the revenue did not increase significantly as a result of the investment in the past 3 years. I know that most of their remaining machines are less than 10 years old and that useful life of CNC machines that are well maintained can be as long as 20+ years.
My estimates is that I can continue to get buy and limit CAPEX investment to around <5-6% of revenue.
My question is this:
How should I think about CAPEX as it relates to enterprise value of the business? If I have to plan 5-6% investment in CAPEX on a go forward basis, should I value the business on 15% approximate adjusted EBITDA (20% adj. EBITDA - 5% CAPEX)?
As always my concern is that lowering the EBITDA this way during my analysis may land me on a number that's no longer competitive to the seller. But if the last 3 years shows heavy equipment investment, I think I probably need to model some level of CAPEX and still have enough to cover debt service at a reasonable DSCR.
Thoughts?
As always thanks for the help from the great community here.
CAPEX and how it relates to adjusted EBITDA to Value the business?
by a searcher from University of Massachusetts at Lowell
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2) Most asset intensive buyers make sure there is excess capacity.
3) Also make sure there is minimal risk to tech obsolescence.
4) If the business is under or at SBA size, asset value is less critical. If the deal is beyond SBA size, then high assets are a major plus b/c they provide collateral for financing.
5) I sold a large business to a buyer. 2 customers. Bank gave 70% against assets, Seller 10%, E 20%. Low-capacity utilization. Then I joined the board. 8 yrs. exit at 28x. All investors were Pari Passu. The main person had 10% warrants.