Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
Evolution Capital · 25 Years · 250+ Deals
Marginal Gains
The quality of your data can have a greater impact on your valuation than many founders realise. This guide explains why buyers place so much emphasis on financial accuracy, consistency, and transparencyand how better data creates stronger deals.
Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
25+
Years in technology M&A
250+
Transactions
$1bn+
In completed transactions
Evolution Capital · From the trenches
- At a Glance
What You'll Learn.
Learn how buyers analyse cost structure during Financial Due Diligence, which metrics have the greatest impact on valuation, and the practical improvements that can increase EBITDA multiples before going to market.
01
Why Cost Structure Matters
02
Gross Margin: The Foundation
03
Margin by Product, Customer & Supplier
04
Reseller vs Services Model
05
Supplier Costs & Procurement
06
Staff Productivity & Compensation
07
EBITDA Normalisation
08
How Buyers Assess Cost Structure
09
Preparing Before Sale
10
Key Takeaways
11
Frequently Asked Questions
Cast your mind back to the glory of our home Olympics; London 2012. The velodrome at the Olympic Park, packed to capacity, roaring every time a British rider crossed the line. Gold after gold after gold. Bradley Wiggins, already the first British man to win the Tour de France just weeks earlier, taking the time trial on The Mall with the whole country watching. Chris Hoy, Victoria Pendleton, Laura Trott. Nine Olympic records. Seven world records. A home crowd that could barely believe what they were seeing.
It wasn’t an accident.
In 2003, British Cycling had appointed Sir Dave Brailsford as performance director. At the time, it was hardly headline news. The team had won a single Olympic gold medal in the previous hundred years. One of Europe’s top bike manufacturers refused to supply them, fearing it would damage their reputation if professional riders were seen on their bikes.
Brailsford’s approach was what he called the aggregation of marginal gains: the belief that if you broke down every element of cycling performance and improved each by just 1%, the cumulative effect would be extraordinary. He started with the obvious things: bike ergonomics, rider nutrition, training programmes. Then he went further. His team tested massage gels for optimal muscle recovery. They hired a surgeon to teach riders the correct way to wash their hands to reduce the chance of illness. They painted the floors of team trucks white so that any speck of dust threatening bike maintenance would be immediately visible. They identified the best pillow for sleep quality and brought it to every hotel on the road.
By the 2008 Beijing Olympics, the British team was winning 60% of available cycling gold medals. By London 2012, they were setting records on home soil in front of their own crowd. Then came six Tour de France victories in eight years across Wiggins, Froome, and Geraint Thomas, from a team that had never won it before in the entire history of the race.
The name of this article is borrowed from Brailsford’s philosophy deliberately. Because in IT services M&A, cost structure improvements work exactly the same way. No single change is transformative. But the aggregation of disciplined procurement, well-structured staff costs, properly allocated margins, and eliminated waste can shift a business from a 6x multiple to a 9x multiple. On £2 million EBITDA, that is a £6 million difference.
The gains can be harder to achieve than revenue growth. But they are often more valuable.
The Cost Structure Issues That Compress EBITDA Multiples in IT Services M&A
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Why Cost Structure Matters as Much as Revenue in IT Services M&A
When a buyer evaluates an IT services acquisition, they are not just buying current profitability. They are buying a platform they plan to scale, integrate, and grow. Cost structure determines how much of that opportunity actually exists and how sustainable the margins are.
A business with disciplined cost management is lower risk. Margins are predictable and unlikely to erode. A business with poor cost management theoretically has upside: fix the inefficiencies and margins improve. But buyers discount that potential heavily because they’re not certain they can capture it, the investment required is often larger than projected, cost discipline problems frequently signal wider operational weaknesses, and making changes risks disrupting the business during a critical integration period.
The result is that buyers pay a premium for businesses with strong cost structure and discount businesses with cost problems, even when current EBITDA is identical.
In IT services specifically, EBITDA margins are an important signal. Because overhead costs are largely fixed, revenue growth passes disproportionately down to the bottom line. A business growing at 15% per year with disciplined costs will see meaningful EBITDA margin expansion. A business with the same growth but creeping cost inflation will not. Buyers can see the difference in the trend data and they price accordingly.
- Process Section
Six Key Drivers
01
Gross Margin
Understand profitability by service, customer, and supplier not just overall revenue.
02
Supplier Management
03
Staff Productivity
Measure utilisation, revenue per employee, and project profitability.
04
Compensation
Align salaries with market rates while maintaining retention.
05
Clean EBITDA
Separate recurring profitability from one-off or owner-related costs.
06
Operational Discipline
Consistent reporting and financial transparency build buyer confidence.
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Start With Gross Margin: The Foundation Everything Else Is Built On
Before examining operating costs, it is worth starting where most IT services businesses should: gross margin.
Gross margin is the revenue remaining after the direct costs of delivering services have been deducted. In IT services, this means the cost of third-party licences and subscriptions, hardware passed through to customers, wholesale connectivity, and in the best-run businesses, the direct staff costs of those actually delivering the services.
That last point matters. The strongest IT services businesses include delivery staff costs within cost of sales rather than burying them in overhead. This creates genuine transparency: the gross margin line tells you exactly how much money the business makes from delivering its services before any management, sales, finance, or administrative costs are applied. It makes service line profitability visible and comparable.
Gross Margin by Product, by Customer, by Supplier
One of the most important pieces of work any IT services business can do before going to market is build a clear picture of gross margin and gross margin percentage across three dimensions: by product or service line, by customer, and by supplier.
This analysis is one of the first things an experienced FDD team will construct. The question they are asking is not simply what the overall gross margin is, but where it comes from, where it doesn’t, and why.
By product or service line.
Managed services, professional services, connectivity, hardware resale, and software licensing all carry very different margin profiles. A blended gross margin of 32% can conceal managed services running at 48% and hardware running at 12%, which tells a completely different story about the business model than the headline figure suggests. Understanding the mix, and the trend in that mix over time, is essential.
By customer.
Gross margin by customer is where some of the most important insights emerge. Some customers will be highly profitable. Others will be low margin, or even negative margin when all direct costs are properly allocated. An FDD provider’s job here is not to scrutinise and penalise: it is to understand the story behind the numbers. A loss-making customer relationship is not automatically a problem. It might be a strategic investment in a large account that anchors a reference or opens a sector. It might be a legacy relationship being managed down. It might be a recent win where implementation costs have temporarily suppressed margin and the run-rate position looks very different. What matters is whether the business knows which customers are low or negative margin, why, and what the plan is.
By supplier.
Understanding what margin the business makes on each key supplier relationship helps identify both commercial risk and opportunity. A Microsoft CSP margin that has been quietly compressing over two years tells one story. A Gamma connectivity arrangement where the pricing hasn’t been reviewed in three years tells another. Supplier-level margin analysis often reveals both where cost discipline has slipped and where a new owner could quickly realise savings.
The businesses that come to market with this analysis already prepared, tracked consistently over two or three years, are far easier to underwrite. They demonstrate management depth. They show that the founder understands the business from the inside, not just the top line. And they control the narrative: rather than waiting for an FDD team to build the picture and draw their own conclusions, the seller is presenting their own analysis with their own explanations.
EC Analytics can help build this infrastructure well before you go to market. Getting gross margin tracked consistently by product, customer, and supplier, and understanding what the numbers mean, is one of the highest-value things you can do in the 18 to 24 months before a sale process begins. It is the kind of work that often reveals things the founder didn’t know, and gives them the time to act on it.
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The Reseller Model vs Services-Wrapped-Around-Products
IT services businesses broadly fall into two structural models, and the gross margin dynamics of each are very different.
The reseller model generates revenue primarily through the procurement and supply of products: hardware, software licences, cloud subscriptions, connectivity. Margins are typically thinner, often 10 to 20%, because the business is buying and selling products where pricing is relatively transparent and competitive. The value-add is in procurement relationships, volume aggregation, and the convenience of a single supplier relationship for the customer.
The services model generates revenue primarily from labour: managed services, technical support, consulting, project delivery. Margins are higher, typically 35 to 55%, because the business is selling expertise and capacity that cannot easily be commoditised. The best MSPs operate a blended model where product resale creates natural touchpoints and renewal cycles that feed into higher-margin managed services relationships.
Buyers distinguish carefully between these. A business reporting £5 million revenue and 22% gross margins is telling a very different story to one reporting £3.5 million revenue and 45% gross margins, even if reported EBITDA is similar. The first has a large, low-margin revenue base that is vulnerable to pricing pressure. The second has a smaller, high-margin base that is far more defensible and scalable.
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One-Off Rebates and Timing Distortions
One area that experienced FDD teams pick up quickly is gross margin distortion created by supplier rebates and delayed cost recognition.
Many IT services businesses receive volume rebates from key suppliers, typically paid quarterly or annually in arrears. If a £120,000 annual rebate from a major distributor lands in Q4, gross margins in that quarter will look materially better than the underlying run rate. A business that went to market having just received a large rebate, or that had deferred recognising a supplier cost into the next financial year, can present a gross margin profile that overstates sustainable performance.
Similarly, some businesses have supplier cost increases that have been agreed but not yet flowed through the P&L at the point of sale. The diligence team will find these. The question is whether you find them first and disclose proactively, or whether the buyer finds them and loses confidence in the numbers.
A good FDD provider will normalise the P&L to remove timing distortions and rebuild gross margin on a true run-rate basis. If that normalised number is materially different from the reported number, it creates doubt about the quality of the financial management and the reliability of everything else in the accounts.
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The Supplier Landscape: Where Margin Gets Made or Lost
For IT services businesses in the UK, supplier relationships are a primary driver of gross margin quality. The major supplier categories each carry their own dynamics.
Microsoft: The Elephant in the Room
For most UK MSPs, Microsoft is the single largest cost line. The shift to the Cloud Solution Provider programme and New Commerce Experience has changed the economics of Microsoft resale significantly.
From January 2024, Microsoft began automatically migrating all legacy CSP subscriptions to annual commitment terms. This changed the cashflow and cost profile for many MSPs who had been running customers on flexible monthly billing. From April 2025, Microsoft introduced a 5% price premium for customers on monthly billing plans for annual subscriptions across Microsoft 365, Office 365, Dynamics 365, and other online services. In other words, customers who want monthly billing flexibility now pay more for it.
For MSPs, this creates both a challenge and an opportunity. MSPs that had been absorbing the difference between monthly customer billing and annual supplier commitments, or carrying the cashflow risk of monthly flexibility, now have clear commercial grounds to restructure how they bill customers. Those who have done this effectively have improved gross margins. Those who haven’t have seen margins compress as supplier costs rose without corresponding customer price increases.
A buyer looking at your Microsoft margin today will want to understand your CSP tier, your rebate arrangements, and whether your customer billing terms are aligned with your supplier commitment structure.
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Key UK Distributors and Their Role in Margin
For hardware and multi-vendor software, the main UK distributors include TD Synnex, Giacom, Ingram Micro, and Tech Data. The commercial relationship with these distributors, including credit terms, volume rebates, and whether you have achieved preferred partner status with key vendors, has a direct bearing on gross margin.
Giacom in particular has become a significant aggregation platform for UK MSPs, consolidating connectivity, Microsoft licensing, and other cloud services. Whether you source through Giacom or manage multiple direct relationships is a commercial and operational choice, but it affects both margin and the transparency of cost structure that buyers will expect to see.
- Timeline
Improve Cost Structure Before Exit
Review major supplier agreements, benchmark employee compensation against the market, and improve procurement processes. Begin tracking staff productivity, utilisation, and project profitability to demonstrate operational discipline.
Clean up the P&L by separating recurring operating costs from one-off or owner-related expenses. Document normalisation adjustments, reduce unnecessary overhead, and ensure financial reporting reflects the true earning power of the business.
Review financial trends, test your gross margin analysis, and ensure every cost movement can be clearly explained. Buyers should see a business with predictable margins, transparent reporting, and evidence of continuous operational improvement.
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Connectivity and Telco Suppliers
For businesses with connectivity and telco revenue, the wholesale supplier relationships with Gamma, Vodafone, O2, Virgin Media Business, and BT Wholesale determine margin at the gross level. These are competitive markets but with meaningful variation in pricing depending on volume, partner accreditation, and the vintage of pricing agreements.
Gamma in particular is widely used by UK MSPs and Telco resellers as a wholesale VoIP and connectivity provider, and pricing agreements can vary significantly between partners. A business that last reviewed its Gamma pricing two or three years ago may be paying materially above what a new agreement would deliver. This is often a straightforward cost synergy that an acquiring buyer can realise quickly, which is worth flagging proactively rather than letting it appear as something they are doing to your business without your knowledge.
The same applies across connectivity suppliers. Buyers with scale, or with an existing supplier base they can bring your volume into, will identify these savings immediately. Positioning this as a visible upside for the buyer rather than an unmanaged cost in your business is the smarter approach.
Staff Costs: The Largest Line in the P&L for Most MSPs
For IT services businesses that are not primarily resellers, staff is typically the largest cost. Getting the structure, level, and measurement of staff costs right is arguably the most important cost discipline task before going to market.
The Right Metrics Tell the Story
Buyers and their FDD teams will build their own view of staff productivity regardless of whether you provide it. The businesses that command premium multiples typically have this data ready: billable utilisation rates by individual and team, revenue per head, gross margin per fee earner, project profitability by customer and engagement type, and sales productivity metrics including revenue per salesperson and pipeline conversion rates.
One consulting business we reviewed had average billable utilisation of 52%, far below the 65 to 70% that is standard for their service model. This meant they were carrying approximately 20% more staff than needed to deliver their current revenue. The founder simply hadn’t measured it. He hired based on capacity concerns during busy periods and never analysed whether the team was properly sized for sustainable workload. When the buyer built this analysis, the conversation shifted immediately from valuation to restructuring.
If you can present these metrics proactively, and show that utilisation has been improving over time, you demonstrate operational management capability. If the buyer has to build the picture themselves, they will be more conservative in what they assume.
Compensation Structure and Market Benchmarking
Market rate misalignment in compensation is extremely common in founder-led IT businesses. Salaries are set historically: someone negotiated well when they joined, someone else accepted the first offer, a loyal employee never pushed for a raise, and a newer hire came in at a different market rate to someone doing the same job.
A cybersecurity business we reviewed had two senior consultants with nearly identical skills and tenure earning £58,000 and £73,000 respectively, a 26% difference with no justification beyond negotiating history. Their three technical support staff were 12 to 18% below market, creating retention risk for the people most critical to service delivery. Their office manager earned £15,000 above market. Net impact: approximately £85,000 more on compensation than the business needed, while still carrying meaningful retention risk in the roles that mattered most.
Buyers will benchmark every role against market data. Where compensation is below market, they factor in the cost to bring salaries up as a required post-acquisition investment. Where it is above market without justification, they treat it as margin that could be recovered, but they discount it because they’re not confident they can actually capture it without disruption.
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Staff Turnover in Key Positions
High turnover in technical or customer-facing positions is a significant concern for buyers, and it tends to reveal itself clearly in the data during diligence. Two or three service engineers leaving in a twelve-month period in a business of twenty people is a story that needs explaining.
The questions buyers ask are whether the turnover is a compensation issue, a culture issue, a management issue, or simply the natural pattern of an industry where skills are in demand. Each has different implications. What the buyer is really assessing is whether the team will survive the transition to new ownership, and whether the relationships and institutional knowledge that underpin the customer base are embedded in the business or in a handful of individuals who might leave.
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Commission and bonus plans that don’t align with business objectives are a common finding in FDD reviews.
One MSP paid sales commission as a percentage of contract value at signing, with no clawback if customers churned in year one. Sales reps prioritised new logo acquisition over customer quality, leading to 28% first-year churn. Another business paid technical staff bonuses based solely on utilisation rates, which incentivised rushing projects and cutting corners rather than delivering quality work. Customer satisfaction scores were declining, but the bonus structure was rewarding the behaviour that caused it.
Incentive Structures That Work Against the Business
Understanding What Should Be Normalised
When buyers and their FDD advisers build a normalised EBITDA figure, they are trying to establish the sustainable, recurring profitability of the business under arm’s-length ownership. This means adding back costs that are genuinely one-off, removing benefits that will not continue post-acquisition, and adjusting for costs that are absent but will need to be incurred.
Common normalisation adjustments in IT services businesses include owner compensation above or below a market rate for their role, personal costs run through the business, family member salaries for roles that may not be replaced at the same cost, one-off legal or advisory costs, exceptional marketing spend that won’t recur, and one-time restructuring or redundancy costs.
The complexity is that normalisation is a negotiation as much as an accounting exercise. Sellers want to add back everything they can. Buyers want to add back only what is genuinely non-recurring and provably so. Where the line falls depends on the quality of your documentation and the credibility of your explanation.
The most common area of genuine complexity is owner costs and related party arrangements.
Overhead, One-Offs, and What Gets Normalised
In most founder-led IT businesses, the founder’s compensation package involves a combination of salary, dividends, pension contributions, and personal benefits. Disentangling this to arrive at a fair market rate for the management function they perform is one of the more nuanced tasks in IT services FDD.
A founder taking a salary of £60,000 but drawing £300,000 in dividends may be receiving total compensation well above what a replacement CEO would cost, or well below it, depending on the scale and complexity of the business. The normalisation will consider what a market-rate CEO would cost and adjust accordingly, with the founder’s total package as the starting point.
Beyond the founder, related party costs can include premises rented from a connected entity at above or below market rates, services provided by family members or associated companies, insurance policies or vehicles that are part personal, and historic decisions about pension arrangements that may or may not continue.
None of these are necessarily problematic. They are normal features of owner-managed businesses. But they need to be identified, disclosed, and treated consistently in the normalisation. Surprises in this area are one of the most common triggers for a breakdown in trust during diligence, and loss of trust in the numbers is very difficult to recover from.
Owner Costs and Related Party Costs
Beyond owner costs, the normalisation exercise will look for other one-off costs that should be added back to arrive at a clean run-rate EBITDA:
Exceptional legal costs around a dispute or regulatory matter that has now been resolved. One-off redundancy costs where headcount was restructured. A significant bad debt write-off that is clearly non-recurring. Development costs for a project that is now complete. These are legitimate add-backs, but they need to be documented and explained clearly.
What cannot be added back is operational spending that simply happens to be low in the period under review, or costs that the seller characterises as one-off but which recur in some form every year. Buyers will build a five-year view of the P&L and any cost that appears every year, regardless of what it is called in any individual year, will be treated as recurring.
Identifying One-Off Costs for Add-Back
One genuinely positive story to tell in IT services M&A is the operational leverage inherent in the model. Overhead costs, management, finance, facilities, and systems are largely fixed. When revenue grows, those fixed costs don’t grow proportionally, which means incremental revenue flows through to EBITDA at a higher margin than the average.
A business that has grown from £8 million to £12 million revenue over three years without proportionally increasing its overhead base is demonstrating exactly this leverage. The EBITDA margin expansion that results is not a one-off event: it is evidence of a scalable model. Buyers value this trajectory because it suggests the margin improvement will continue as they grow the business post-acquisition.
The counterpoint, which buyers will also look for, is whether overhead has grown ahead of revenue: whether headcount, facilities, or systems have expanded in anticipation of growth that hasn’t materialised. This is a warning sign of poor cost discipline and tends to attract a discount.
The Fixed Cost Leverage Argument
Sophisticated buyers and their FDD advisers conduct detailed cost analysis that goes well beyond reviewing the P&L.
How FDD Teams Assess Cost Structure
Peer benchmarking
Experienced IT services investors have databases of cost metrics across hundreds of portfolio companies and targets. They know what good looks like. They will compare your costs across multiple dimensions: sales and marketing as a percentage of revenue, G&A as a percentage of revenue, technology and tools costs per employee, facilities costs per person, staff costs as a percentage of revenue by function, and gross and contribution margin by service line. Costs above peer benchmarks without clear justification are treated as inefficiency.
Supplier contract review and market testing
For significant supplier relationships, buyers will obtain alternative quotes to test whether you’re paying market rates. If your connectivity costs are materially above what comparable businesses pay with comparable suppliers, the difference becomes a normalisation consideration and a signal about procurement discipline.
Compensation benchmarking by role
Using salary survey data and recruitment market intelligence, buyers benchmark every role against comparable positions. Where compensation is below market, they factor in the cost to bring it up. Where it is above market without justification, they assess whether it can be recovered.
Process maturity assessment
Buyers assess whether systematic processes exist for procurement, compensation management, budgeting, and cost control. They interview staff about how decisions are made: how suppliers are selected, how salary reviews work, how project profitability is tracked. The answers reveal whether you have disciplined management or decisions made by habit.
Cost structure problems compress valuation through several mechanisms simultaneously.
The Commercial Impact on Valuation
Multiple compression
Even where EBITDA is normalised, weak cost discipline signals operational immaturity. A business with strong cost management might command 8 to 9x EBITDA. The same EBITDA with poor cost management might achieve 6.5 to 7.5x because buyers perceive higher operational risk and required investment. On £2 million EBITDA, that is a £3 to £5 million valuation difference.
Earnout structure
Cost structure problems often lead buyers to propose earnouts rather than full upfront payment. The offer becomes: we’ll pay a premium multiple on the EBITDA you actually deliver post-acquisition once we’ve stabilised the cost base, but we’re only comfortable with a lower multiple upfront. This transfers risk to the seller and reduces deal certainty.
Required post-acquisition investment
Where compensation is below market, buyers factor in the cost to bring salaries up. Where systems are inadequate or processes are manual, they factor in investment requirements. These reduce the net value of the business to the buyer and therefore the price they’re willing to pay.
Cost discipline is not something that can be manufactured in the weeks before going to market. With 12 to 24 months of focused effort, meaningful improvements are achievable and will show in the trend data.
Set up proper gross margin reporting by service line. If you’re not tracking gross margin by managed services, professional services, connectivity, and hardware separately, start now. Include direct delivery staff within cost of sales. This single structural change often reveals where the business is actually making money and where it isn’t.
Conduct a supplier review. For any supplier relationship above £25,000 annually, obtain competitive quotes. This is particularly relevant for Microsoft CSP arrangements, connectivity through Gamma or equivalent providers, and insurance and facilities. You don’t have to switch suppliers. But you need to know whether you’re paying market rates, and you need to be able to demonstrate to buyers that you’ve checked.
Benchmark every role against market compensation. Use salary surveys and recruitment market data to build a view of market rates across your team. Identify where you’re materially above or below market and develop a plan to address it over 12 to 18 months. Create clear salary bands and remove the ad hoc negotiation approach that creates internal inequity.
Track and present staff productivity metrics. Billable utilisation, revenue per head, margin per fee earner. If you can show these metrics improving over time, you are demonstrating operational management capability. If you can’t produce them at all, you are creating a gap that buyers will fill with conservative assumptions.
Clean up the P&L. Go through every cost line and identify what is genuinely one-off, what is personal or owner-related, and what is waste that serves no business purpose. Build the normalisation case proactively rather than letting buyers construct it themselves.
Document and explain necessary investments. If you’ve spent money bringing salaries to market rates, implementing new systems, or restructuring the team, explain this proactively. Buyers distinguish between wasteful spending and necessary investment. What they don’t forgive is unexplained margin decline.
How to Strengthen Cost Structure Before Sale
Dave Brailsford didn’t turn British Cycling around with one brilliant idea. He turned it around by finding one hundred small improvements and compounding them. The pillow and the hand-washing technique and the white truck floor all seem trivial in isolation. Together, they helped produce a decade of dominance.
Cost structure in IT services M&A works the same way. Tighter procurement, properly structured gross margins, market-aligned compensation, visible staff productivity metrics, clean P&L with understood one-offs, and a credible normalisation story. None of these changes is transformative on its own.
Together, they are the difference between a 6x business and a 9x business. On £2 million EBITDA, that is £6 million.
The Bottom Line
The cost and margin issues described in this article are rarely visible from the outside. They live in the detail of supplier contracts, compensation histories, utilisation data, and customer-level P&L that most founders have never had cause to pull together in one place. That is precisely why buyers find them, and why they use them.
The work of addressing cost structure and gross margin transparency is not something you can do in the weeks before going to market. It takes time to build the data, time to implement the changes, and time for those changes to show up as a credible trend rather than a last-minute cleanup.
EC Analytics (Virtual CFO / CFO Assist) is designed for exactly this. Working with IT services businesses in the 18 to 24 months before sale, we build the financial infrastructure that makes this analysis visible and defensible. That means setting up gross margin reporting by product, by customer, and by supplier so you understand where you are actually making money and where you aren’t. It means tracking the costs that need to be identified over time: supplier pricing drift, compensation misalignment, utilisation trends, one-off costs that need to be categorised correctly for normalisation. And it means building the evidence base that allows you to walk into a sale process with your own analysis, your own explanations, and your own story, rather than waiting for a buyer to construct it and draw their own conclusions.
We also work with sellers on the normalisation narrative: identifying owner costs and related party arrangements, categorising one-offs properly, and building a pro forma EBITDA that is credible and defensible rather than aspirational.
Corporate Finance. When you are ready to go to market, we run the process: finding the right buyers, managing diligence, and negotiating terms that reflect the operational quality you have built rather than accepting a price that treats your business as a generic asset.
On the FDD side, when we review the cost structure of an IT services business as a buyer’s adviser, our starting point is always the gross margin analysis. We build it by product, by customer, and by supplier. Where we find low or negative margin relationships, our job is not to penalise: it is to understand. There is often a perfectly sound commercial explanation. A large customer taken on at thin margins to establish a sector reference. A legacy relationship being managed to a natural conclusion. A loss-leader product that feeds a high-margin services relationship. An experienced FDD provider working in this sector should be seeking the truth behind the numbers, not constructing the worst-case interpretation.
What we are really assessing is whether the business understands its own economics. The founders who know which customers are low margin and why, who can explain the trajectory, and who have the data to back it up, are far easier to back than those for whom the analysis is a surprise.
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Related Articles
What EBITDA margin should an IT managed services business be targeting before sale?
As a general guide, EBITDA margins of 18 to 25% are considered healthy for IT MSPs with a predominantly managed services revenue model. Margins above 25% attract premium multiples. Margins below 15% attract scrutiny unless there is a clear explanation and an improving trend. What matters as much as the absolute margin is the direction of travel: a business expanding from 16% to 21% over three years tells a very different story to one static at 22%.
What is the difference between gross margin and EBITDA margin in IT services?
Gross margin is revenue less direct costs of delivery: licences, hardware, connectivity, and in the best-structured businesses, direct delivery staff. EBITDA margin takes that gross profit and deducts sales, marketing, management, finance, and administrative costs. IT services businesses should track both. Gross margin by service line reveals where the business actually makes money. EBITDA margin shows how much of that flows through after overhead.
How does Microsoft's CSP billing structure affect IT services valuations?
Microsoft’s move to New Commerce Experience and annual commitment terms, completed through 2024, changed the cost and cashflow dynamics for many UK MSPs. The 5% price uplift introduced in April 2025 for monthly billing plans means MSPs who haven’t aligned customer billing terms with supplier commitment structures may be carrying margin compression they haven’t fully recognised. FDD teams will examine Microsoft margin carefully, including CSP tier, rebate arrangements, and whether customer billing is structured to reflect the underlying supplier cost.
How do buyers assess staff productivity in IT services acquisitions?
Buyers typically analyse billable utilisation rates by individual and team, revenue per head, gross margin per fee earner, project profitability by customer and engagement type, and sales productivity metrics including revenue per salesperson. Businesses that can present these metrics proactively, with an improving trend over two to three years, demonstrate management capability and command better multiples. Businesses that can’t produce the data invite conservative assumptions.
What owner costs typically get normalised in IT services M&A?
Common normalisation adjustments include founder compensation above or below a market rate for the management role, personal costs run through the business, family member salaries for roles that may not be directly replaced, one-off legal or advisory costs, and premises or services sourced from connected entities at non-arm’s-length rates. The key is that normalisation adjustments need to be clearly documented and defensible. Surprises in this area are one of the most common triggers for loss of trust during diligence.
Are supplier rebates counted in gross margin during financial due diligence?
Yes, but carefully. FDD teams will typically restate gross margin to remove the timing effect of rebates received in any single period and rebuild the underlying run-rate margin. If your reported gross margin is materially higher than the run-rate margin because a large annual rebate landed in the period under review, the normalised figure used for valuation will reflect the run rate. This is one of the reasons that presenting multi-year gross margin data by service line, rather than a single-year headline, is always the stronger position.
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