Do you still value a company on EBITDA if it has high CAPEX?

July 15, 2023

by a searcher in United States

Hi Everyone,

I've been looking at a business recently that I'm excited about. Its EBITDA is right in my target range, the business has some scale, it has a diverse employee base, room (and I think a plan) to grow, etc. But the business requires an ongoing investment in CAPEX that obviously falls below the line on the P&L (i.e., depreciation). To give you some context, the EBITDA margin is around 12% but CAPEX is another 6% of revenue. I know almost everyone looks at EBITDA, but do you think it makes more sense to look EBITA (i.e., don't exclude the "D") since the CAPEX is an ongoing requirement? Or do you think about it some other way?

One other related question: will an SBA lender allow you to borrow more in the future to fund CAPEX? If they'll let you, the business can support itself for a few years (since you'd get to finance the CAPEX and not have to pay for it all at once). But if you won't be able to finance it, it will be much more difficult to make it work without lower the multiple or putting more money down.

Reply by a searcher
in Tyler, TX, USA

I run into this all the time as a searcher focused on manufacturing businesses. Happy to talk further if helpful, just DM me. As others have pointed out, EBITDA less recurring/maintenance capex is a reasonable proxy for free cash flow - the money which you have available to service debt. Since the capex for this business is meaningful, the business cannot support as much debt as a capex-lite business with equal EBITDA. Therefore, (all else equal) the valuation will not be as high.

Conventional lenders will typically include maintenance capex in the DSCR covenant calculation, and SBA lenders will look at it in their DSCR evaluation.

Regarding the financing of future growth capex, I believe that would be allowable under SBA loans - the financing partner for that particular investment would take a lien on only that asset. The bank making the SBA loan *may* have to approve that asset being carved out of their collateral base, but since it wasn't there when the loan was made, I'm not positive.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Most lenders are going to do adjust CAPEX based on the on-going need for CAPEX or historical average investments in CAPEX. If the company was growing and adding equipment to achieve that growth, there can always be an argument that future CAPEX should be less than current CAP.EX. But in general lenders are going to adjust EBITDA by future CAPEX needs.

If there are immediate CAPEX needs and the business cash flow supports it, you could roll CAPEX into the SBA loan for the immediate need. But cash flow would need to be sufficient on a historical basis to support the debt service. And lenders are still going to make CAPEX adjustments to cash flow for future needs to qualify.

Happy to discuss in more detail at any time. You can ping me here or directly at redacted Good luck with your search.

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