Maintenance vs growth capex, explained simply
Buyers must fund maintenance capex every year, so it reduces the cash value of earnings. Growth capex is discretionary. Because EBITDA excludes both, diligence compares maintenance spending with depreciation and with the age and condition of the asset base.
Spending below depreciation over several years suggests that assets are being consumed faster than they are replaced.
Capital expenditure against depreciation
IllustrativeAlder Creek Manufacturing, $ millions
Maintenance spending was below depreciation of $0.8 million for three years.
Worked example
For three years Alder Creek’s maintenance capex was below depreciation, and a site visit shows aging machinery. The buyer estimates $1.5 million of catch-up spending in year one and asks for it to be treated as a reduction of the price.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
How diligence assesses it
- Compare maintenance capex with depreciation over several years
- Review asset ages and repair history
- Interview operations managers
- Examine past and planned capital expenditure
Why it matters in a deal
Low capex before a sale makes cash flow look stronger than it is, and the buyer funds the shortfall afterwards.
Red flags
- Capex falling sharply in the years before the sale
- Rising repair costs, a sign that replacement has been deferred
- Growth capex claimed without a clear expansion plan