We have a solid history of steady profitability, but a broker told me that a buyer will discount our business because our gross margins are highly sensitive to raw material price fluctuations. How do we structure our client contracts now to protect our valuation from this risk?

Question

Tyler Smith · Accepted Answer

If your business gross margins fluctuate wildly with raw material price changes, buyers will see this volatility as a significant risk and discount your valuation. To protect your EBITDA and secure a top tier market multiple, you must insulate your pricing from these market swings before you go to market. The solution lies in how you structure your client contracts. Begin by auditing your long term customer accounts and renegotiating agreements to include automatic material surcharge clauses or indexed pricing models. These mechanisms automatically adjust your selling price when key input costs rise, shifting the margin risk away from your balance sheet. During due diligence, this contractual structure proves to a buyer that your margins are highly protected, regardless of external market conditions. It transforms what would have been viewed as a volatile commodity business into a highly predictable, resilient operation. By proving that you have successfully institutionalized margin protection, you eliminate a major objection, allowing you to defend your valuation and demand a premium multiple based on the stability and predictability of your future cash flows.