The Machine Nobody Budgeted For

Every plant tour has a moment the seller does not know he is having. On one walk, years into doing this, it came when the maintenance lead put his hand flat on the frame of the big press, the way you touch an old dog, and said she has been good to us. The machine was 22 years old. It ran 2 shifts. Depending on the week, 40% of revenue passed across its bed. The manufacturer had been bought twice since it shipped, and the man who could rebuild its controls had retired to 2 counties away and answered the phone when he felt like it.

None of that appeared anywhere in the financials. The press had been fully depreciated for over a decade. On paper it cost nothing, produced everything, and would apparently do so forever. The books said this was a wonderful arrangement. The hand on the frame said otherwise.

Where EBITDA Stops Telling the Truth

EBITDA earns its place as shorthand. It lets buyers compare businesses with different debt, different tax situations, and different depreciation histories on something like equal footing. But the metric contains a buried assumption that gets more dangerous the smaller and older the company. It treats capital equipment as a sunk historical fact rather than a recurring cost of staying alive.

Warren Buffett's phrase for the correction is owner earnings, which is roughly EBITDA minus the capital spending genuinely required to hold the business where it stands. In a distribution business the 2 numbers sit close together. In a 40-year-old machine shop they can be separated by a third or more of reported earnings, and the trailing 12 months will not warn you, because deferred CAPEX is silent right up until it is a crisis.

Lenders figured this out before buyers did, which is why senior credit agreements quietly run on fixed charge coverage rather than EBITDA alone. The bank wants to know what cash remains after the machines take their share, and a buyer would be wise to underwrite at least as conservatively as his own lender. When the bank's model and the buyer's model disagree about maintenance CAPEX, the bank's model was built on more funerals.

The deferral is rarely dishonest, and owners deserve that said plainly. A man 3 years from retirement, staring at an $850K rebuild on a machine that still holds tolerance, makes the same call almost every time. He nurses it. His maintenance lead gets better at the machine every year, the rebuild slides right, and reported earnings quietly firm up as spending falls below what the equipment actually consumes. He is simply aging alongside his fleet, and both facts land in the buyer's lap on the same day.

A fully depreciated machine is a bill that has already been mailed and simply has not arrived.

Paul W. Swaney III

How I Read the Iron

The diligence for this lives in unglamorous documents. The fixed asset register, read with the dates on, tells you the average age of the fleet and how spending has trended against depreciation. When a company depreciates $700K a year and has spent $200K a year on equipment for 6 straight years, that half-million gap is a loan the fleet has been extending to the P&L, and it compounds.

The maintenance log tells you more than the register. Unplanned downtime creeping upward, the same subsystem failing 3 times in 18 months, parts getting harder to source, a rebuild quoted and postponed twice. The floor tells you the rest. I ask machine operators one question, which machine scares you, and they always know, immediately and specifically. No data room has ever answered that question as accurately as the second shift does.

Then comes the number most buyers skip, replacement reality, meaning the whole path rather than the sticker price. The press that anchored that plant listed around $1.2M new, but the honest figure included rigging, foundation work, controls integration, operator retraining, and a lead time that quoted at 14 months. A business running near capacity on a machine with a 14-month replacement horizon is carrying a risk that no insurance product covers. That fact belongs in the price, whichever side of the table you sit on.

Surfacing It Early, on Purpose

Here is the part sellers should hear as good news. The CAPEX conversation only wrecks deals when it arrives late. A buyer who discovers a 7-figure equipment cliff near the end of exclusivity has 2 options, walk or reprice, and both feel terrible to everyone. The same fact, on the table in the first month, is just structure. Price it in, share it through an earnout tied to the rebuild, or split the spend across the close. I have seen every version work when it was surfaced early, and I have watched the late version kill deals that deserved to live.

The structures are not complicated. If the press needs its $850K rebuild in the next 2 years, the parties can split it, with the seller crediting half against price and the buyer funding the rest from the first year's cash flow. Or the price stands and a holdback releases when the rebuild comes in at budget. Or the seller simply does the rebuild before going to market and sells a plant with fresh iron, which usually returns the spend with interest, because buyers pay a premium for the absence of questions. Every one of those outcomes beats the version where the machine becomes a referendum on trust in week 10.

So the owner's move, ideally a few years before a sale, is to write the truth down first. An honest 5-year equipment plan, machine by machine, with quotes attached, does something subtle and powerful. It converts a scary unknown into a scheduled cost, and buyers pay full multiples for scheduled costs while discounting heavily for scary unknowns. The owner who hands me his own CAPEX plan has taken the single biggest surprise off the table and, usually without knowing it, has raised his own price.

Walking the Floor Myself

Institutional buyers solve this problem with money. They commission equipment appraisals, engineering studies, and reserve schedules, and the findings arrive as exhibits in a report, weeks after the questions were asked. The process works, mostly, and it costs more than it teaches.

My model does not allow that luxury, which has made me better. As a independent sponsor I walk the floor myself, early, before the heavy diligence spend, in work boots, asking the maintenance lead about the machine he pats. I am the same person who will own the rebuild decision after close, so I am incapable of treating the question academically. The hand on the frame, the tone of the answer, the age of the iron. That is the real CAPEX schedule. The books just have not caught up to it yet, and my job is to price the difference before it prices me.

I am the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.