Equicapita - Capital expenditures and the value of your business

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Equicapita is a Calgary-based nano-gap private equity fund focusing on acquiring Canadian SMEs that can generate strong, sustainable cash flow from their operations in niche markets. Equicapita generally seeks to acquire businesses: at what it believes are reasonable prices; with a demonstrated history of free cash flow greater than $1 million per annum; with a durable competitive advantage; that operate in industries that Equicapita believes have sound long-term macro prospects; with ongoing participation of senior personnel; with the ability to maintain the cash flow without disproportionate amounts of new capital; where Equicapita can partner with management and align their interest with Equicapita through tools such as earn-outs, vendor take backs and management incentive plans; to be held for the long term; where there is some potential to grow sustainable free cash flow, but where that growth is not essential to generate suitable returns.

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Equicapita - Capital expenditures and the value of your business

  1. 1. 1Capital Expenditures – How Do They Impact Value? Capital Expenditures – How Do They Impact Value? The annual capital expenditures of a business tell a lot about the operating and growth philosophy of a business. Furthermore, there are two types of capital expenditures that a company makes; sustaining capital expenditures and growth capital expenditures. Maintenance capital expenditures represent replacement of retired and outdated machinery and equipment. These expenditures are required to sustain the existing level of business operations. The average annual capital expenditures that fall into the maintenance category roughly represent the annual depreciation that is expensed on the assets. For a company that has been experiencing relatively low growth and stable earnings, we would expect to see relatively consistent annual capital expenditures. On the other hand, a company that is growing or has growth plans would have capital expenditures that are greater than the average depreciation expense. This shows investment in the business over and above the status quo. We often see businesses with stated growth plans that are rather aggressive, but are not matched with corresponding historical or planned increases in capital expenditures. This shows that the company is just hoping for growth instead of truly creating it. Capital expenditures can impact value in two key ways. If ongoing maintenance capital expenditures are consistent and represent a significant component of otherwise “discretionary” cash flow, this shows a relatively capital intensive business or a business with a slate of older assets that need replacing, and cash flows would be adjusted to show the ongoing nature of these cash outflows. This would reduce the value compared to a business that is not capital intensive or has a newer group of assets with a longer life and a delayed requirement for additional investment. If on the other hand the capital expenditures are fairly lumpy and are followed by periods of growth, this shows a business that is building capacity and although capital expenditures would be considered in forecasting future cash flows, future cash flows would reflect a growth profile because of the consistent investment in additional capacity.
  2. 2. 2Capital Expenditures – How Do They Impact Value? ABOUT EQUICAPITA Equicapita is a private equity fund that acquires established, private, small and medium sized enterprises (“SMEs”) located primarily in Western Canada. Equicapita’s investment drivers are to acquire operating companies at attractive valuations, with a history of generating sustainable cash flow and proven management teams. Equicapita believes that there is: - a generational opportunity to acquire ‘baby boomer’ SMEs; and - a funding gap in the $2 to $20 million enterprise value range. The retirement of baby boomer business owners has been described as triggering one of the biggest transfers of corporate assets on record in Canada. This creates an environment with an abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash flow multiples. Equicapita provides investors with access to this alternative asset class via an efficient RRSP eligible structure. DISCLAIMER The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Equicapita and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither Equicapita nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to Equicapita and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting Equicapita or its relevant affiliate directly.

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