Valuation when recurring capex (EBIT vs EBITDA)

by a searcher

1 week ago

Hi all,

Looking at a haulage / waste management business which seems interesting, growing at ~10% pa and healthy margins. However, it's quite CAPEX intense (as you'd imagine, i.e. if they have 50 trucks, they need to replace 5 and buy 5 new ones...

Their EBITDA is 2 million, but EBIT is only ~500-600k due to depreciation. When modeling this deal using EBITDA and a 4x multiple, I struggle to understand how to actually pay for the debt involved in the deal. So when discussing with investors, the advise I got was when there's regular capex required, it's best to use EBIT rather than EBITDA.

I'm afraid when talking to the owners, their expectation will be based around EBITDA (they mentioned they want 10m, meaning we can probably get away with 7.5-8), but when I do the calc on 500k, I might not want to offer more than 2m.

Any tips / comments / thoughts?

Thanks!

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24 comments

searcher from Duquesne University

I've reviewed the discussion and fully support the FCF approach because it does provide a true picture of the business's cash flow and long-term viability. It also underscores the buyer’s ability to accurately assess future profitability and make a fair offer. However, it's important to note that if the seller's advisors have already conducted their analysis, they are unlikely to budge significantly based solely on the FCF approach, especially if the offered price aligns with market expectations. Any modeling scenarios showing a significantly lower valuation will likely be dismissed, as that may not truly reflect the strategic value or growth potential seen by other potential buyers.

1 week ago | like reply | 1 like

searcher from The University of Chicago - Booth School of Business

Look at all the fleet records and find out how intensive are they are using them. Are they running them into the ground and getting salvage value for them or leasing them and getting residual value. FCF is definitely the analysis you want to use here but then you also need to set aside reserves for fleet replacement. So you’ll need a schedule of capital outlays for PPE and net the DCF for outlays against FCF.

1 week ago | like reply | 0 likes

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