How does annual capex affect valuation?

searcher profile

June 13, 2025

by a searcher in New York, NY, USA

I’m looking at a business with $1M EBITDA, but with $300k of equipment expenses annually that don’t flow through the P&L and are captured in the balance sheet, ultimately affecting cash flow. If the industry comps from recent deals in the industry indicate a 3.5x ebitda multiple, how should I think about valuation for this business?
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Reply by a searcher
from University of Virginia in New York, NY, USA
You should be factoring in "Maintenance CapEx" as part of your Unlevered Free Cash Flow calculation. Take your EBTIDA, subtract Income Taxes, and then subtract Maintenance CapEx. That is going to be the "true" SDE (which is likely going to be different than the SDE the broker tells you). Feel free to DM me. I can send you the model I use for this.
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Reply by a searcher
from Emory University in Tucson, AZ, USA
The HBR Guide to Buying a Small Business includes walk-through examples of capex on valuations (lessens cash flow, thus lessens the value of the company, thus should lessen the valuation to achieve your goal IRR). You may also be interested in reading up Warren Buffett's commentary regarding depreciation and amortization when reviewing companies with significant capex/depreciation.
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