Understanding the difference between Repairs & Maintenance (R&M) and Capital Expenditure (CapEx) and how to separately account for each, can add millions to the value of your business. This is important for businesses at all stages, but is imperative for businesses looking to sell.
In a nutshell, here are the differences between R&M & CapEx:
- Repairs & Maintenance costs are for routine maintenance to keep your assets running in their current state. These can be factored into Profit & Loss for the year.
- Capital Expenditure costs are funds spent to improve assets beyond their original benefit. These are not attribute to a business's Profit & Loss for the year.
Nash Advisory is dedicated to helping you understand the different kinds of expenditures and assets related to your business. For accurate, expert advice on selling your business, get in touch with our team.
Repairs & Maintenance (R&M)
R&M costs are necessary for the company to continue operating in its current state. These costs are therefore expensed in the Profit & Loss statement over the year, lowering the profit of the business.
Examples of R&M expenses include:
- Repairs to machinery used in the production of inventory
- Vehicle maintenance, like oil changes, servicing, and engine tune-ups
- Repairs to property that doesn't inherently extend the life of the building
In essence, if an expenditure is made to maintain something in its current state, it falls under R&M. A general rule of thumb is that the benefit of any R&M works will not be endured for longer than 12 months. The repair should be classified as R&M expense and not Capital Expenditure.
Capital Expenditure (CapEx)
CapEx is money spent by a company on assets that are anticipated to provide an enduring benefit to the business of usually 12 months or more. CapEx purchases commonly relate to the purchase of Property, Plant & Equipment (PPE).
The expense is not attributed to the business’s Profit & Loss. The expenditure goes through the cash flow statement and is capitalised as an asset on the balance sheet with the assets wear and tear periodically recognised as depreciation expense in the Profit & Loss.
Some examples of CapEx include:
- Replacing an entire unit of property, like a fence, oven, or cupboards
- Improvements, extensions, and renovations to buildings
- Initial repairs on property when purchased, like fixing defects and damage
In essence, if an expenditure prolongs the life of an asset, it falls under CapEx.
Why does correct categorisation matter?
The distinction between R&M & CapEx is important for a number of reasons. Incorrectly categorising these expenditures can impact upon valuation, leading to a less than ideal result when it comes time to sell your business.
1. The business’s valuation is quite often a result of the profit multiplied by an industry multiple.
If Capital Expenditure expenses have been classified incorrectly as R&M, then the profit for the period will be lower, ultimately affecting the valuation of the business.
[feature_link]There are many other facets that affect business valuation, especially when valuing a business via the multiples approach.[/feature_link]
2. The distinction affects the cash flow of the business. The level and timing of required R&M has a direct impact on a company’s cash flow.
If R&M is high, a company’s free cash flow will be relatively low. This means that:
- Debts can be paid
- Dividends can be distributed
- Investors will be attracted to the business
If a business can borrow heavily, it can boost returns and is better positioned to weather any unexpected slowdowns.
3. Investors will commonly look to perform diligence and checks to ensure that the business has been reinvesting in its future.
A common check performed is a comparison between the depreciation expense for the period against the Capital Expenditure spend. If in excess, the business is viewed as investing heavily into its future. For this reason, the classification between R&M and CapEx becomes increasingly important, and should be undertaken by a professional.
How Nash can help
If you’re considering selling your business, it pays to ensure that R&M and CapEx expenses have been correctly categorised. It is important to seek expert knowledge to ensure that the full value of your business is realised. Nash Advisory has all of the expertise you need to formulate an accurate view of your business before a sale.