Splitting capital expenditure into maintenance and growth components is a key FDD task. Learn the methodology and why it matters for buyers.
Capital expenditure analysis is a standard work stream in financial due diligence. While the total CapEx figure is straightforward to extract from the cash flow statement, what buyers and their advisers really need is to understand how much of that spend is necessary to maintain the existing business versus how much is discretionary investment in future growth.
The split between maintenance and growth CapEx has two significant implications for deal economics:
Free cash flow calculation. Maintenance CapEx is a recurring cash cost needed to sustain EBITDA — it reduces the true free cash flow available to service debt or distribute to equity holders. Growth CapEx, by contrast, is optional and should be evaluated alongside the growth it is expected to generate.
Valuation. A buyer paying an EBITDA multiple implicitly assumes that EBITDA is a fair proxy for normalised earnings. If maintenance CapEx is high relative to depreciation, the business's true earnings power is lower than reported EBITDA implies.
Maintenance CapEx — sometimes called sustaining CapEx — is the investment required to keep existing assets operating at their current level of productivity and generate the current level of revenue and EBITDA. It typically includes:
Growth CapEx is discretionary investment intended to increase capacity, enter new markets, or improve the business beyond its current run-rate. Examples:
There is no universally agreed methodology, which is why this is often a point of discussion between buyer and seller advisers. Common approaches include:
Ask management to break down the CapEx ledger line by line, classifying each project as maintenance or growth. Useful as a starting point, but subject to optimistic classification by sellers who want to inflate normalised free cash flow.
A rough cross-check is to compare maintenance CapEx with the depreciation charge. Over time, a business that is neither shrinking nor growing should spend approximately as much maintaining assets as it depreciates them. A sustained gap warrants explanation.
Review CapEx over three to five years. Identify spikes — are they one-off growth investments or evidence of deferred maintenance catching up? Low CapEx years may signal underinvestment that will require catch-up spend post-deal.
In capital-intensive businesses, a detailed review of the asset register against the CapEx ledger allows the FDD team to trace spend to specific assets and validate the classification.
In the FDD report, CapEx analysis typically appears in a dedicated section covering:
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