Capex is the cash a business spends to buy or replace equipment. It is recorded as an asset, not an expense, so it never reduces EBITDA. A business can show strong EBITDA while still spending heavily every year to keep its equipment running. Capex comes in two kinds. Maintenance capex replaces worn-out equipment and is needed to keep earnings at today’s level. Growth capex buys extra capacity to earn more, and the business can stop it without losing current earnings. A buyer paying for today’s earnings takes on the maintenance capex. Growth capex buys earnings that are not in the price. Where Capex Gets Misread - Replacement put off before a sale: Owners planning to sell often run old equipment longer. Cash improves while EBITDA stays the same, and the buyer inherits the replacement bill. The warning sign is several years of capex well below depreciation while repair costs rise. - Replacements counted as growth capex: Swapping a small truck for a bigger one is mostly replacement. Only the extra capacity counts as growth, and only if it brings in new revenue. - Recurring repairs added back as one-offs: Sellers often add major repair costs back to EBITDA as one-time items. If the same repairs come up every year or two, they are a normal cost of running the business, and adding them back overstates EBITDA. - Owner buys equipment it used to rent: Rent paid on equipment is an operating expense, so it reduces EBITDA. Buying the equipment outright is capex, so it does not. If an owner stops renting a loader at $4K a month and buys one before the sale, EBITDA rises by $48K a year. The business is still paying for the loader, just through capex instead of rent. How It Affects The Loan And The Price Lenders decide how much to lend based on how much cash the business has left each year to make its loan payments. A common measure is the fixed charge coverage ratio (FCCR). It takes EBITDA, subtracts the capex the business pays from its own cash and the taxes it pays, then divides the result by the year’s loan payments of principal plus interest. A ratio of 1.25x means the business has $1.25 of cash for every $1 of loan payments. The more the business must spend on maintenance capex, the less cash it has left for the loan. Illustrative Example An HVAC services business earns $1.5M EBITDA, pays $250K in taxes and runs 30 service vans. A van costs about $70K and lasts six years, so keeping the fleet current costs about $350K a year. The owner spent only $100K a year, and 10 vans are already past six years. The buyer’s loan runs seven years at 10%, so each $1 borrowed costs about 20.5 cents a year. Using the owner’s spending, $1.15M ($1.5M − $100K − $250K) is left for loan payments. At 1.25x, that supports $920K a year, or a loan of about $4.5M. Using what the fleet needs, $900K ($1.5M − $350K − $250K) is left. At 1.25x, that supports $720K a year, or a loan of about $3.5M. The loan is about $1M smaller. The buyer has to fund that gap with more of its own equity or by asking the seller to finance part of the price. The 10 vans past their life cost about $700K to replace, which is about 9% of a $7.5M price at 5x EBITDA. Buyers either ask for a lower price or treat the cost like debt and subtract it from what the seller receives at closing. Sellers push back, and the final amount is negotiated. Considerations For Both Sides - Buyers: Check how old each major asset is against how long it is expected to last. Compare capex with depreciation and repair costs for each of the last three years. Estimate replacement at today’s prices. Require the seller to keep buying equipment as budgeted until closing. - Sellers: Keep replacing equipment on schedule in the years before a sale. For each purchase labelled as growth, show the new revenue it was bought to produce. Share Your Perspective: Has a capex issue changed the loan size or the price on a recent deal? Reply and share how it was resolved.