Module I· PP&E, Capex & D&AAdvanced
Question
How do you estimate maintenance capex in a middle-market DD without management disclosure?
Answer
Mechanics
Standard approach in buy-side DD when the sell-side gives no breakdown:
- Long-term D&A average: maintenance capex ≈ D&A over the last 5 years. The cleanest approach for steady-state industrials.
- PP&E replacement estimate: gross PP&E / average useful life × inflation factor.
Deep diveShow more details
Example
Industrial Manufacturing Co has gross PP&E of 200 with an avg. 10-yr useful life → replacement 20 p.a.
- Industry benchmark: apply the sector maintenance-capex / sales ratio — e.g. middle-market machinery makers 3–4% of sales.
- Asset-by-asset bottom-up: analyze the PP&E register, identify assets nearing end of useful life, back into a replacement plan — the cleanest but most time-consuming method. Cross-check: if capex / D&A < 0.7 over several years and asset aging (average asset age / useful life) > 70%, it signals underinvestment plus a coming replacement wave. Adjustment: set the maintenance-capex estimate 10–20% above reported capex.
Pitch tip
'Implied maintenance capex of $25m p.a. is $5m above LTM capex; the DCF forecast is normalized to a sustainable level → equity value −$15m'.