Valuation when recurring capex (EBIT vs EBITDA)

September 02, 2024

by a searcher in London, UK

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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Reply by a searcher
from Bowling Green State University in Surrey, BC, Canada

For asset-heavy businesses with regular, recurring capex like waste management, trucking, etc., it's critical to factor ongoing fleet management and financing into your projections.
In general, this is part of the reason multiples are generally lower in these businesses. In some cases, net (appraised) asset value can be a better gauge of valuation. It's that stark (relative to cash flow multiples).
On the plus side, the asset values provide a measure of collateral for lenders, thereby reducing financing costs and potentially enabling longer amortization (depending on asset useful life).
Best to look at a fleet appraisal on DD and engage your lender to understand available terms, along with a leaseline'equipment finance line post close.
Another plus, generally these businesses have low working capital needs, meaning operation LOC is likely a non-issue.
Just a few quick off-the-cuff observations. Good luck

Reply by a searcher
from Durham University in London, UK

EBITDA is a simple proxy for free cash flow in businessess without much capex. Where there is a log of capex it is better to think of multiples of FCF. EBIT is lazily the same thing but D&A are accounting measures you should swap that with the annual cash cost. That will give you a better measure of pre-financing and tax cash flow to apply valuation / leverage multiples to and to inform sustainable debt service. Often in these businesses expansion is working capital hungry so consider that too as you think about sustainable debt service levels. 4x FCF or EBIT is going to be a lot less than 4xEBITDA yes - this is the education journey you have to take the owners on. Trick is to balance rapport building with working out as efficiently as possible if the price you can pay is something they'll never accept.

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