Deferred Capex
How do you find deferred maintenance before you buy a business?
Old equipment. Low capital spending in recent years. Fully depreciated assets still in service. Profit is high because nothing was reinvested.
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- The fixed asset register with acquisition dates, so you can see the real age.
- Capital spending for five years, plotted against depreciation.
- Which assets are fully depreciated and still in daily service.
- A walk of the facility with someone who knows what the equipment should sound like.
The question to ask the seller
“When were major assets last replaced, and what needs replacing in the next two to three years, at what cost?”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
Skipped maintenance shows up as profit. It is a bill you inherit, and it tends to arrive in the first two years, which is exactly when your debt service has the least room in it.
Get quotes, not estimates, for everything due in the next three years. Subtract that number from your effective purchase price and see whether the deal still works.
Subtract the coming bill from your effective price. Large and near-term means negotiate down or walk.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
The flags live in the community, applied to real deals every week. Membership is complimentary.
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