In middle-market aerospace and defense (A&D) M&A, valuation is based on many business attributes which we discuss in these weekly Deal Note®. Today, we’re focusing on gross margin management.
When prospective buyers evaluate an A&D business, they look beyond top-line revenue to assess a company’s durability. Margins tell the story. A business that has demonstrated consistent—or improving—gross margins signals pricing power, cost discipline, and operational efficiency. In the competitive A&D sector, where many contracts are multi-year and pricing adjustments may be tied to escalators or renegotiations, the groundwork for a future sale of your business is often laid in the pricing decisions made today.
Many middle-market A&D businesses track margins at the company level but fail to measure them by product line, service category, or program. Without that granularity, it’s easy to unintentionally subsidize low-margin contracts with higher-margin work, obscuring true profitability and limiting leverage in both negotiations and customer discussions. The margins you negotiate today shape the story you can tell tomorrow. Letting them erode, even remain flat over several years, can quietly shave millions from the price you will receive when you sell your business.
Best practices for Gross Margin Management are:
Regular Reviews: Review your estimated and actual gross margin on a regular basis (monthly, quarterly and annually) and investigate and mitigate any variances, especially in cost assumptions, labor, material and overhead.
Set minimum margin thresholds: Set thresholds for your sales team and have strict approval processes for all exceptions.
Margin Opportunity Team: Establish a team of your best people and have them meet regularly (monthly) to identify new opportunities to increase your Gross Margin.
Sellers who can demonstrate favorable gross margins will be rewarded with higher prices for their businesses. The best time to start addressing these key issues is long before you have any interest in selling your company.
Have a great day everyone,
Troy Medeiros
Vice President
