Why does one often model 'capex holidays' in the first forecast years of an LBO?
When the target comes out of family ownership or is carved out of a group, there is often catch-up investment needed (modernization, IT, plant). The sponsor argues the opposite: a short-term reduced capex, because the prior owner already invested or working capital can be optimized.
Deep diveShow more details
MidCap Machinery Inc historically at a 6% capex ratio. Sponsor plan: 4% in Years 1–2, then back to 6%.
| Year | Capex ratio | Sales | Capex ($m) | Cash effect |
|---|---|---|---|---|
| Historical | 6.0% | 200 | 12.0 | — |
| Forecast Y1 | 4.0% | 210 | 8.4 | +3.6 vs run-rate |
| Forecast Y2 | 4.0% | 221 | 8.8 | +4.4 |
| Forecast Y3–5 | 6.0% | 232+ | ~14 | normalized |
A capex holiday in Years 1–2 frees up $8m of additional cash for debt paydown — relevant for leverage reduction and IRR.
Bankers check carefully whether the capex ratio was already raised before closing (seller tuning). In family-owned middle-market companies there is often systematic underinvestment — then the 'holiday' becomes reality, and later a problem.
Seniors test 'What does the DD report say about the capex hypothesis?' — a good answer points to the asset-age profile in the commercial DD.