Amazon Web Services

When buying a business, the action is all in the gross margin line

Xavier's diligence rule: ignore revenue and go straight to the gross margin dollars, then check for embedded costs like AWS hosting or expensive SaaS contracts. That tells you how much money you actually have to play with to make a profit or pay employees.

“You got to just look at the gross margin line. Like that's where all the action is. And then you got to understand, are there any embedded costs like Amazon Web Services hosting or other expensive SaaS contracts or products? So to me, it's like, OK, what is the gross margin dollars that you have to play with to either make a profit, pay employees, or lose money, right?”

Steal thisWhen evaluating an acquisition, look at gross-margin dollars first, not revenue — then subtract embedded hosting and SaaS costs to see the real money to work with.