How to handle recent CapEx spend?

professional profile

August 18, 2023

by a professional from University of North Carolina at Chapel Hill in Atlanta, GA, USA

I am nearing LOI on a ~$2.5M deal where I was just informed that the owners spent $~250k on CapEx to replace some major pieces of equipment. I'm glad this was discovered before I acquired it and was surprised by these expenses, but now I'm wondering how to address these recent CapEx expenses in my offer. That's effectively 10% of the purchase price that the owner just spent for the benefit of the next owner - how do I either account for that in my offer or bridge what is now a more significant gap between my offer and the seller's price expectations?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. However, because the owners just spent money on CAPEX, in my opinion it should not impact the value of the transaction. If you look at their historical EBITDA, you should already be making adjustments for future CAPEX needs in what you are willing to pay for the business. So in theory if you are making annual adjustments for future CAPEX needs, the CAPEX they already spent should already be accounted for.

Now if they expensed that CAPEX purchase through the company versus putting it on the balance sheet, you would need to get evidence it was a one-time investment to try and add it back for cash flow for a lender to use. However, if it was properly booked on the balance sheet, it should not be impacted EBiTDA.

Hopefully this makes sense. I would be more than happy to jump on a call to discuss it in more detail. You can ping me here or directly at redacted Good luck.
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Reply by a searcher
from University of Virginia in Richmond, VA, USA
The capex shouldn't have surprised you. Between the balance sheet and income statement that's one of the first things to check for in each of the last five or so years with the capex formula to see how that's trended from year to year. All the ingredients are there on the tax returns.

As far as the recent capex investment, that's irrelevant to the purchase price. The only real questions are "How long will that capex investment last in terms of corporate benefit?" and "What is your expectation for capex in years to come?"
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