Our overall margins look decent, but we have never done a true activity-based costing or gross margin analysis by client class. How do we audit our client profitability on our exit runway to make sure we are not presenting low-margin, high-maintenance clients to a buyer?

Question

Tyler Smith · Accepted Answer

Buyers hate low-margin revenue because it represents operational drag. If a significant portion of your revenue is generated by needy, low-margin clients, a sophisticated buyer will discount your valuation. You must identify and address these unprofitable relationships on your exit runway.

Start by auditing your customer base. Analyze the gross margin of each client, factoring in the actual labor and operational hours spent servicing them. You will likely find a subset of clients that eat up an enormous amount of your team's time while contributing very little to your bottom line.

Assign a quarterly Rock to your finance and operational leaders to conduct this analysis. Once you have the data, bring it to your leadership team session to IDS®. You must decide whether to raise prices on these low-margin clients, renegotiate their contracts, or systematically offboard them.

At the same time, refine your target market definition in your V/TO®. Ensure your sales team is focused entirely on acquiring high-margin clients that fit your Core Focus®. Track your customer acquisition and gross margin metrics weekly on your Scorecard.

By pruning unprofitable clients and refocusing your sales pipeline on your ideal customer profile, you will improve your overall gross margins and increase your EBITDA. More importantly, you will present a clean, high-performing client portfolio to prospective buyers, which commands a premium multiple.