Capital Expenditure Patterns in Main Street M&A

Capital Expenditure Impact on Main Street M&A Valuations 2025-2026

Capital expenditures (CapEx) are a critical factor in small business M&A, influencing valuations, deal structures, and financing. Here's what you need to know:

• CapEx and Valuations: Physical assets funded by CapEx contributed an average of 18% to enterprise value in 2025, with fluctuations between 7.3% and 22.9%. Buyers increasingly focus on recent earnings rather than historical performance, penalizing erratic growth.
• Key Trends: Technology upgrades (e.g., AI, cybersecurity) were the top CapEx priority in 2025, driven by buyers aiming to modernize operations. Asset-heavy industries like transportation saw higher valuations, while manufacturing faced declining deal activity due to rising costs.
• Financing Challenges: Tight credit conditions in early 2026 make financing harder for weaker deals. Comparing SBA 7(a) loans vs. other financing options, such as private credit and creative deal structures (e.g., seller notes, earnouts), helps bridge funding gaps.
• Seller Strategies: Sellers can boost their business value by timing CapEx investments 12–24 months before selling, focusing on modernizing technology, expanding service offerings, and improving efficiency.

Bottom Line: Buyers are cautious, and sellers must justify valuations by showing strong CapEx planning and stable financial performance. Both parties should navigate tightening credit markets and prioritize investments that align with market demands.

How Capital Expenditures Are Allocated in Main Street M&A

The way capital expenditures (CapEx) are allocated in Main Street mergers and acquisitions (M&A) offers a glimpse into what drives value in these deals. In 2025 and early 2026, technology and digital transformation emerged as the top CapEx priority. Buyers focused heavily on integrating AI, upgrading cybersecurity, and modernizing digital infrastructure to overhaul outdated systems. This trend aligns with broader concerns in the market - 28% of buyers, particularly "corporate refugees", cited fears of AI replacing jobs as a motivator for acquiring businesses. Their aim? To invest in technology that enhances, rather than replaces, human-led services. These tech investments often set the stage for broader operational improvements and diversification strategies.

Another major focus area is operational capacity and diversification. Buyers often use CapEx to expand into new markets or add complementary services. For example, an HVAC company might acquire a plumbing business and then invest in streamlining operations between the two, creating a more comprehensive service offering that boosts customer retention. By scaling operations and diversifying revenue streams, businesses can gain cost efficiencies and build resilience.

After acquisitions, growth initiatives take center stage. Capital flows into areas like marketing campaigns, hiring efforts, and employee training to help businesses capture the expanded market share that mergers bring. Benjamin Weiser, Policy Advisor at the Center for Entrepreneurial Opportunity, explains:

"early gains tend to come from modest cost savings... Over the longer term, businesses can expand their market share or geographic reach and make better use of physical assets, leading to revenue growth and better profit margins".

In asset-heavy industries, physical asset maintenance remains a crucial CapEx category. Net Asset Value (NAV) - the worth of a company's physical assets - averaged 18% of enterprise value in Q2 2025, with a range of 7.3% to 22.9% over the previous three years. Sectors like transportation and warehousing, where multiples exceed 5.0x, depend on steady CapEx to maintain fleets and equipment. Ignoring these investments can quickly erode a company's value.

Post-Pandemic Changes in Capital Allocation

The pandemic reshaped how Main Street businesses think about CapEx. Risk mitigation and business continuity now take precedence over pure growth. Businesses allocate funds to enhance operational flexibility, ensuring they can adapt quickly to disruptions. This shift has redefined priorities, with companies focusing on investments that build resilience for future challenges.

Another major shift: technology spending skyrocketed in the recovery period. What started as emergency investments in remote work tools evolved into full-scale digital transformation efforts. By 2025, businesses were prioritizing AI capabilities, cybersecurity, and semiconductor-related assets in their CapEx plans.

Industry-Specific Capital Expenditure Patterns

CapEx priorities also vary significantly by industry. For example, manufacturing faced serious challenges in 2025, with transactions declining 11% due to rising costs and supply chain issues. Manufacturing is inherently capital-intensive, requiring constant investment in equipment, facilities, and inventory. This made such businesses less appealing to buyers, who instead targeted companies with modernized operations and diverse supply chains.

In contrast, service-based industries proved more resilient. Sectors like financial services, technology services, and architectural/engineering firms saw stronger deal activity and pricing in 2025. These industries typically focus more on human capital and technology than physical assets, with average EBITDA multiples hitting 3.7x in Q2 2025.

Retail, meanwhile, enjoyed a comeback, with multiples averaging 3.6x in Q2 2025. Retailers often direct CapEx toward improving customer experiences, such as upgrading point-of-sale systems, enhancing e-commerce platforms, and optimizing store layouts. These investments tend to have predictable costs and shorter payback periods compared to manufacturing.

The transportation and warehousing sector stood out with the highest multiples, exceeding 5.0x in Q2 2025. These businesses demand ongoing CapEx to maintain fleets, warehouse equipment, and logistics technology. The asset-backed nature of these investments provides collateral value, making financing easier. NAV in this sector often surpasses the 18% average, emphasizing the importance of physical assets in determining enterprise value.

The construction sector peaked in Q3 2024 but declined throughout 2025. This industry faces unique challenges, including high equipment costs, rapid depreciation, and uneven cash flows tied to project-based revenue. Buyers must carefully weigh CapEx needs against projected earnings to ensure these deals remain financially sound.

How CapEx Affects Business Valuation and Deal Structure

CapEx and Its Effect on Business Valuation

CapEx plays a significant role in shaping business valuations, especially when structuring deals. Its impact is tied to both the scale and timing of investments. For instance, in Q2 2025, the average trailing twelve months (TTM) EBITDA multiple dropped to 3.3x, marking the lowest point in three years. In contrast, the 3-year average EBITDA multiple stood at 3.9x, signaling that buyers are prioritizing recent performance over long-term historical trends.

Interestingly, businesses with TTM EBITDA exceeding their 3-year average by over 30% often face valuation penalties. On the other hand, companies with stable earnings tend to enjoy a 0.4x multiple premium over those with erratic growth patterns. CapEx continues to influence Net Asset Value (NAV), contributing an average of 18% to enterprise value. However, this figure has varied between 7.3% and 22.9% over the past three years. This is particularly relevant for asset-heavy industries, where physical assets not only boost valuations but also provide collateral to support financing.

A key distinction during due diligence is the difference between maintenance CapEx and growth CapEx. Buyers scrutinize historical CapEx spending to determine the free cash flow available for debt servicing. If essential upgrades have been deferred, buyers often reduce the purchase price or adjust working capital terms to account for upcoming costs. On the flip side, sellers who can clearly demonstrate strong returns on recent CapEx investments typically have more leverage to justify higher valuations.

CapEx Considerations in Purchase Agreements

CapEx also plays a pivotal role in shaping purchase agreements. In small business acquisitions, Net Working Capital (NWC) usually accounts for 10% to 20% of the purchase price. Sellers must ensure that recent CapEx expenditures haven't reduced working capital levels to the point where they could trigger price adjustments. To avoid disputes, buyers and sellers negotiate how recent CapEx investments affect the working capital peg, ensuring fair compensation for investments that ultimately benefit the buyer.

Deferred consideration - such as seller notes and rolled equity - currently makes up 9.9% to 34.8% of acquisition funding. Additionally, earn-out provisions, which allow sellers to benefit from future returns on CapEx investments, have been included in 7.5% of Main Street deals (44 out of 584).

Mitch Berlin, EY Americas Vice Chair, highlights the strategic focus on CapEx in recent consolidation efforts: "Recent consolidation activity - particularly among large strategic acquirers - reflects a targeted intent to create larger, more efficient business operating platforms that can enhance competitive positioning, cost efficiency and improve cash-flow resilience".

Buyers are increasingly structuring deals around future CapEx plans, particularly in areas like AI infrastructure, autonomous mobility, and fintech. These investment roadmaps often serve as a basis for justifying valuations and negotiating terms. Sellers who align their CapEx strategies with these priorities before entering negotiations are more likely to secure advantageous deal structures and favorable terms.

Financing Challenges for CapEx in Main Street Businesses

Credit Access and Financing Gaps

Securing financing continues to be the biggest hurdle in Main Street M&A transactions. As of Q1 2026, 38.9% of market participants anticipate that obtaining financing will become even tougher in the first half of the year, while 39.4% expect conditions to remain tight without significant changes. This environment favors buyers with strong financial credentials, leaving others struggling to secure favorable terms.

The divide between well-qualified buyers and weaker deals has grown. According to DealStream Staff, "well-qualified buyers are still able to secure credit, but weaker deals are not". Lenders are becoming more selective, closely examining both the acquisition and the buyer's ability to handle post-acquisition CapEx without overextending cash flow.

For many buyers, personal assets like savings or home equity must be pledged to secure acquisition loans, which limits available funds for future investments. Benjamin Weiser, Policy Advisor at Third Way, highlighted the personal risks involved:

"When buyers put personal assets, such as savings or home equity, towards loans for ETA [Entrepreneurship through Acquisition], they are also putting their financial security on the line".

Upfront costs can also drain resources before the deal even closes. After closing, loan payments often strain short-term cash flow, making it harder to fund immediate capital expenditures. This problem is compounded by a 6% decline in small business cash flows between the second and third quarters of 2025, further reducing the capital available for reinvestment.

SBA Loans and Alternative Financing Options

With credit conditions tightening, buyers are turning to creative financing solutions. SBA 7(a) and 504 loan programs remain popular choices, particularly for the growing group of "corporate refugees" - who now make up 40% of buyers in the market. These loans offer more manageable terms and lower down payment requirements, helping buyers conserve cash for post-acquisition needs.

Local community banks may also offer some relief. The Community Bank Sentiment Index has stayed above 100 (neutral) for two consecutive quarters as of late 2025, indicating that these banks might provide more flexibility for buyers with strong local connections and solid CapEx plans. Equipment financing is another option, allowing buyers to spread out the cost of specific assets over time while maintaining working capital.

Private credit and nonbank lenders have stepped in to address financing gaps as well. For instance, Main Street Capital Corporation reported nearly $700 million in gross investments in 2025, showcasing the role of private lending even amid economic uncertainty. These one-stop debt and equity solutions are particularly useful for smaller companies with revenues between $10 million and $150 million.

The market is also seeing a rise in creative deal structures like seller notes, earnouts, and rolled equity, which help defer some capital requirements and free up cash for immediate CapEx. Robert Brauns, CEO and Founder of DealStream, summed up the market's adaptability:

"Buyers are still engaged, sellers are adjusting expectations, and intermediaries are seeing real deal flow - which tells us this isn't a market on pause, but one that's adapting".

Platforms like Clearly Acquired are helping bridge these financing gaps by using AI-driven underwriting to match buyers with the right lenders across SBA, bank, non-bank, and private credit markets. With AI-powered financial analysis and tailored financing options - such as SBA 7(a) loans, equipment financing, and working capital lines - buyers can assemble funding strategies that support both acquisitions and necessary CapEx investments without draining personal assets or operational cash flow.

CapEx Planning for Sellers Preparing to Exit

Increasing Business Value Through CapEx

If you're planning to sell your business, timing your capital expenditures (CapEx) is key to maximizing its value. Ideally, these investments should be made 12–24 months before listing your business. This timeline allows any operational improvements or revenue growth from those investments to show up in your trailing twelve-month (TTM) EBITDA - a critical metric buyers use to assess value.

Certain types of CapEx investments tend to deliver the best results. Expanding capacity or diversifying your portfolio can significantly enhance valuations. For example, an HVAC company that invests in plumbing equipment can offer a wider range of services, opening the door to larger, higher-margin projects. Similarly, a contractor adding design-build capabilities becomes more appealing to strategic buyers seeking geographic expansion or more varied revenue streams. These kinds of targeted investments can directly influence how much your business is worth.

Investments in operational efficiency are also highly effective. Projects that reduce fixed costs or improve supplier negotiations can stabilize margins, which buyers closely examine during due diligence. Take a regional distributor as an example: by automating its warehouse operations, it can cut labor costs and speed up order fulfillment. This kind of operational leverage not only boosts EBITDA but can also lead to higher valuation multiples.

Finally, technology upgrades are becoming non-negotiable. With 40% of small business buyers in 2025 expected to be "corporate refugees" leaving traditional jobs, these buyers are looking for businesses with modern, tech-driven operations. Investments in areas like AI, cybersecurity, and data management make your business more attractive by offering a turnkey setup that doesn't require immediate post-acquisition spending. Addressing outdated systems or aging equipment can also eliminate potential negotiation points that buyers might use to lower your sale price.

Aligning CapEx with Buyer Priorities

Once you've identified value-boosting CapEx projects, the next step is to align them with what buyers are actively looking for. As of early 2026, 37.1% of Main Street M&A participants see the market as favoring buyers, compared to just 19.1% who view it as favoring sellers. This shift means sellers need to work harder to justify their valuations by making strategic investments that resonate with buyer priorities.

Buyers today are more selective and cautious. Benjamin Weiser, Policy Advisor at the Center for Entrepreneurial Opportunity, highlights that buyers are "more cautious and deliberate" due to factors like inflation, tariffs, and immigration-related challenges. This means sellers should focus on risk mitigation investments - such as equipment that enables the business to adapt to market disruptions or diversify its offerings. These investments show buyers that your business is prepared for uncertainties, making it a safer bet.

Tailoring CapEx to your sector is also important. Industries like Business Services (39.4% expected deal activity growth), Construction & Contractors (37.7%), and Energy & Utilities (37.2%) are seeing the most activity in 2026. Sellers in these fields should prioritize investments that improve scalability and remove operational bottlenecks, making their businesses more appealing to both strategic and financial buyers.

Tools like Clearly Acquired can help sellers fine-tune their exit strategy. Using AI-powered business valuation and readiness analysis, this platform identifies which CapEx projects will have the greatest impact on your valuation. By prioritizing these investments, you can enhance operational transparency and demonstrate that your business is ready for a deal. Combining this with financial normalization, a compelling buyer narrative, and targeted marketing to qualified buyers ensures that your CapEx strategy translates into better valuations and smoother transactions.

Conclusion

Capital expenditure (CapEx) trends are reshaping the structure, valuation, and financing of Main Street M&A deals. Here's what the data shows: Net Asset Value (NAV) made up 18% of enterprise value in Q2 2025, fluctuating between 7.3% and 22.9% over the past three years. This highlights the importance of physical assets - often driven by CapEx decisions - as a key factor in these transactions.

Timing is just as important as the investment itself. Businesses with consistent earnings enjoy a 0.4x premium over those with erratic growth patterns. Sellers can take advantage of this by showcasing steady efficiency improvements, while buyers should dig deeper than revenue figures to evaluate whether a company has maintained disciplined capital allocation.

The market is also shifting. With TTM EBITDA multiples hitting a 12-quarter low of 3.3x and acquisitions closing 10.5% below asking prices, both buyers and sellers need to adjust their expectations. Buyers currently hold the upper hand going into 2026, and sellers must justify their valuations by proving that CapEx investments have reduced risks and strengthened operational stability.

FAQs

How do buyers separate maintenance CapEx from growth CapEx in due diligence?

Buyers distinguish maintenance CapEx from growth CapEx by assessing the intent behind each expenditure. Maintenance CapEx covers expenses needed to maintain existing operations - things like repairs, equipment replacements, or upgrades to keep things running smoothly. On the other hand, growth CapEx is all about expansion, whether it's increasing production capacity, acquiring new facilities, or entering fresh markets.

To make this distinction, buyers often dig into financial statements, examine expenditure breakdowns, and review operational plans. This helps them properly categorize expenses, ensuring a clearer valuation and a better grasp of future investment requirements.

What CapEx timing best increases TTM EBITDA before a sale?

Strategic capital expenditures (CapEx) can play a key role in boosting operational efficiency and driving growth, especially when timed carefully before a sale. By making well-thought-out investments, businesses can not only improve their trailing twelve months (TTM) EBITDA but also increase their overall valuation. This approach makes the business more appealing to potential buyers while maximizing return on investment (ROI).

How should a deal be structured when upcoming CapEx is unavoidable?

When a deal involves future capital expenditures (CapEx) that can't be avoided, it's crucial to plan for these costs in the deal structure. Some common strategies include:

• Adjusting the purchase price: This ensures the buyer isn't overpaying by factoring in the anticipated expenses.
• Using escrow or holdbacks: Setting aside funds to cover these costs can provide a safety net for future investments.
• Adding contractual clauses: Clearly defining which party is responsible for the CapEx helps avoid disputes and ensures both sides are on the same page.

These steps are designed to protect the buyer from unexpected financial burdens while fostering agreement on how to handle future spending.