How to think about necessary CapEx relative to EBITDA multiples?

by a searcher

10 months ago

Say a business has $1M EBITDA, but is dependent on a set of machinery or vehicles that require periodic replacement at an average cost of $300K per year.  Businesses like this seem to consistently be listed by brokers at 4-5x EBITDA, with no "discount" given for the necessary recurring CapEx. Are these businesses just overpriced? Or is it standard to ignore that cost when valuing the business? Obviously the answer will vary somewhat by industry, but this seems to be the norm across a range of industries.

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searcher from University of Pittsburgh

If you are correct in telling us that this is indeed the multiple range ("listed" != "sale price") when considering a TEV/EBITDA valuation (what types of comps are we talking?), then no it's not overpriced based on THAT valuation method, if the EBITDA is real. However, "valuation" is typically triangulated based on a host of different valuation methods (M&A, Public Comparables, DCF, LBO, etc). Capex is not considered in a TEV/EBITDA but is in DCF, LBO. You need to understand what drives each and the situation to know which should be given more weighting over others. You should also be thinking about financial analysis that is non-valuation-specific like FCF Conversion and how this industry compares to another.

9 months ago | like reply | 0 likes

intermediary from The University of Chicago - Booth School of Business

CapX impacts value. Each business has its unique need. One should not start with industry multiples and discount b/c industry multiples have broad categories.
Run DCF on cash flow. That is the only way.
I ran 10% CapX vs. 30% CapX on a base case It took me 10 sec0nds to do the following sensitivity analysis.
Results are as follows for reduction in multiple for a business with 10% vs. 30% CapX.:
a) 18% reduction in multiple if new CapX can be externally financed 75% (meaning 25% is funded from operations).
b) 28% reduction in multiple if 100% of new CapX is funded from operations.

There are many other variables. You can download the software from www.BVXpress.com. Or call me and we will do a live valuation on Zoom of your specific case###-###-#### .

9 months ago | like reply | 0 likes

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