Prospective buyers praise our top-line revenue growth but point to our gross margins trailing industry benchmarks by eight percentage points as justification for a lower EBITDA multiple. What operational steps can we take to systematically expand our gross margin profile and defend an institutional valuation multiple?

Question

Tyler Smith · Accepted Answer

Buyers view gross margin as the ultimate test of product differentiation and operational efficiency. In the lower middle market, a company with forty-two percent gross margins is frequently viewed as a commoditized service provider, commanding a four to five times EBITDA multiple. A peer with fifty-five percent gross margins commands six to eight times because every incremental dollar of revenue drops more profit to the bottom line without proportional overhead growth.

To lift your gross margin and multiple prior to sale, examine your delivery model. Begin by identifying your bottom twenty percent of clients by gross margin contribution. Use your EOS Scorecard to measure gross margin percentage by service line and by account. Reprice unprofitable accounts or institute minimum engagement thresholds. If clients leave, your capacity frees up for higher-margin work, which immediately expands your EBITDA.

Next, eliminate customized service delivery. Buyers discount multiples when operations rely on bespoke work because custom work cannot be easily scaled under new ownership. Document your Core Process under the EOS model, defining the exact steps required to deliver value consistently. Standardize service tiers and eliminate one-off scope creep.

Incorporate automated workflows and modern technology into your delivery engine to reduce labor hours per unit of delivery. When you prove to an acquirer that your gross margins are expanding quarter over quarter due to standardized processes and pricing discipline, you validate pricing power. Pricing power and operating leverage are the two primary drivers that expand a multiple from commoditized to premium.