Capital Expenditures (CapEx)
Amounts invested in acquiring or improving long-term assets — equipment, machinery, vehicles, technology — needed to maintain or grow the business.
Definition
Capital expenditures (capex) are the investments a business makes in acquiring, replacing, or improving its long-term assets. That can include production equipment, vehicles, IT systems, facility renovations, or any other asset with a useful life of more than a year.
In French-language Quebec documentation, you’ll see capex or dépenses en capital used for the same concept.
Two categories are commonly distinguished: maintenance capex, which covers the replacement of end-of-life assets to sustain current operations, and growth capex, which funds capacity expansion or the development of new markets.
Why capex matters in a business sale
In the context of a transaction, buyers don’t look only at your EBITDA — they calculate free cash flow by subtracting maintenance capex. It’s that residual cash flow that determines the real ability of the business to repay acquisition debt and generate a return. $800,000 of EBITDA with $300,000 of annual maintenance capex isn’t worth the same as $800,000 of EBITDA with $100,000 of capex.
Deferred capex is a frequent trap. If you’ve pushed off replacing aging equipment to improve short-term results, an experienced buyer will catch it in due diligence. They’ll adjust their price down to reflect the investments they’ll need to make after the transaction — and that adjustment will often exceed the real replacement cost.
Conversely, an owner who has invested steadily in their assets and can show a realistic capex plan reinforces the credibility of their financial projections and reassures prospective buyers.
What every seller should know
- Buyers subtract maintenance capex from EBITDA to calculate free cash flow — that’s the number that determines the price they’re willing to pay.
- Deferring asset replacement to inflate results before the sale is a risky strategy: the buyer will adjust the price down, often more severely than the real cost of the deferred investments.
- Document clearly the distinction between maintenance capex and growth capex in your financial statements — growth capex isn’t subtracted the same way and can even be a value argument.
- Keep an up-to-date register of your assets with their age, condition, and planned replacement schedule — that’s a document any serious buyer will ask for.