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  • Writer's pictureEric Williams

How much does your gross margin vary?

While businesses often see some level of fluctuation in their net margin from year-to-year, in many well-run businesses gross profit margin (Sales less Cost of Goods Sold) will not vary dramatically from year-to-year. A fluctuating gross margin can signal a variety of possible problems to a buyer including:

  • It is subject to fluctuations in inventory and other direct costs of producing its product or service, and the business isn’t able to pass along those price increases to its customers.

  • The business has inconsistent suppliers.

  • It hasn’t been able to manage wages or production costs efficiently.

  • Expenses may not be consistently reported - for example, in some years perhaps a certain expense is classified as Cost of Goods Sold, but in other years that same expense has been classified as a Sales, General and Administrative expense.

There are some legitimate reasons why gross margin could significantly vary which may not be due to problems. For example, if a company had a significant shift in sales of products or services that have different levels of Cost of Goods Sold it could be a valid reason for a significant shift in overall gross margin. Yet, this still may result in higher buyer uncertainty due to lack of stability in the gross margin.

If your company experiences gross margin fluctuations from year to year, you may want to either address this issues well in advance of trying to sell the business, or have a good explanation for the fluctuations that won’t cause buyers to perceive greater risk.


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