Gross margin vs EBITDA: where they're supposed to land
Service agencies should clear 55–65% gross margin after team and subcontractor cost. EBITDA margin 20–30% is healthy; above 30% usually means productization, seniority leverage, or excellent utilization. Below 15% EBITDA and the business is funding its growth from owner savings.
Owner salary is NOT EBITDA
Pull a real, market-rate owner salary out before EBITDA — otherwise the multiple math is fiction. A buyer will normalize it back in and offer less. If you're not paying yourself a real salary today, the EBITDA number on this page is inflated by exactly the gap.
What drives the valuation multiple
Same EBITDA can be worth very different numbers depending on the underlying mix.
- • Retainer % of revenue (higher MRR = higher multiple).
- • Client concentration — anything above 25% from one client compresses the multiple sharply.
- • Team-not-founder dependence (can it run without you?).
- • Niche / vertical (insurance-tech retainers > generalist project shops).
- • Documented systems, IP, and proprietary process.
Where margin actually leaks
Run this calculator monthly. Margin drops slowly, then all at once.
- • Subcontractor cost passed through at 1.0× instead of 1.4–1.6×.
- • Bench time on senior people that no one wants to talk about.
- • Scope creep on retainers — the 'small ask' tax.
- • Tooling sprawl — every team picks its own stack.
- • Slow invoicing — net-60 retainers are an interest-free loan to your client.
FAQ
What's a healthy agency EBITDA margin?
20–30% net EBITDA margin is healthy for a service agency. 30%+ usually requires productized retainers, seniority leverage, or very strong utilization. Below 15% and you're either underpriced or under-utilized.
What multiple do agencies actually sell for?
3–6× EBITDA is the typical range. Productized retainer-heavy shops with low client concentration get 5–6×. Project-heavy, founder-dependent shops cap at 3–4×. Anything above 6× usually involves strategic acquirers paying for capability, not financial returns.
Should I count my owner salary in EBITDA?
No. Pull a real, market-rate owner salary out before EBITDA. Anything left over is profit — that's the number multiplied by the valuation multiple. Mixing them inflates the headline number and any sophisticated buyer will normalize it back.
Why is my gross margin so low?
Two usual suspects: subcontractor cost being passed through at zero markup, and senior people stuck on delivery work below their loaded cost. Re-price the subs at 1.4–1.6× and move senior time to strategy or sales.