Gross margin
Gross margin is revenue minus the direct cost of goods or services sold, expressed as a percentage of revenue. It measures how much a business keeps from each sale before covering overhead like rent, marketing, and administrative salaries, and it’s usually the first place a buyer looks to judge the health of the core pricing model.
Gross margin isolates the most basic economics of a business: what it costs to actually produce or deliver whatever it sells, set against what customers pay for it. Everything else — rent, marketing, management salaries — sits below the gross margin line, in operating expenses.
Why it’s an early diligence checkpoint
A business with a thin or declining gross margin has less room to absorb rising costs or fund growth, no matter how healthy its overall revenue looks. Buyers often check gross margin trend over several years before moving on to other metrics, since a weakening core margin is harder to fix than an overhead problem.
How it varies by business type
Gross margin norms differ enormously by industry — a software business and a grocery store are not comparable on this measure, since one has almost no direct delivery cost and the other runs on thin per-unit margins by design. Comparisons are only meaningful within a similar type of business.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Treadstone LawLegal commentaryHow to Read a Business's Financial Statements Before You Buy in Ontario
- 02Treadstone LawLegal commentaryCleaning Up Financial Statements Before Selling Your Ontario Business
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