Gross Margin
(Revenue − COGS) / RevenueGross margin measures the percentage of revenue remaining after direct costs. It indicates pricing power and production efficiency.
How it's used in a deal
Compare against industry benchmarks. Gross margin below 20% may leave limited room for debt service after operating expenses.
Worked example
Fictional Precision Auto Service, FY 2024. Missing inputs remain unavailable.
Gross margin: 47.6%
Inputs and supported results from our fictional sample deal report — Fictional, incomplete example. No real customer documents, verified source support or independent accountant review are supplied.
Important caveat
Gross margin definitions vary by industry. Ensure COGS includes only direct costs and not allocated overhead.
Frequently asked questions
What gross margin should I look for?
It's industry-specific: service businesses often run 50–70%, distribution 15–30%, restaurants 60–70% on food but thin at the bottom line. What matters most in diligence is the trend — a compressing margin means rising costs aren't being passed through, which erodes debt service capacity.
Why did the margin change between years?
Common causes: supplier price increases, mix shift between labor and parts revenue, misclassified expenses moving between COGS and OpEx, or one-time inventory write-offs. Margin swings without explanation are a top seller question.
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Educational content from a decision-support tool — not a CPA audit, review, or assurance engagement, and not tax, legal, or investment advice.