You cannot have a strong MSP EBITDA margin if your Service Gross Margin (SGM) is weak. SGM is what you have left after paying the direct costs of delivering your services—mainly your engineer salaries and your "cost of goods sold" (COGS) like cloud licenses and security software.
High-performing MSPs target a Service Gross Margin of 50% or higher. If you are paying $50 to deliver a service you sell for $100, you have $50 left to cover your "Admin and General" (G&A) expenses and your sales costs. If your SGM drops to 30%, you will likely struggle to stay profitable once the office rent and insurance bills arrive.
- Non-Standard Stacks: Supporting ten different firewalls and five different antivirus products across your client base kills efficiency.
- Unbilled Out-of-Scope Work: Doing project work under the guise of "support" without charging for it.
- Excessive Reactive Tickets: Spending time fixing the same printer issue over and over rather than solving the root cause.
- Poor Onboarding: Bringing on a messy new client without a cleanup project, leading to a spike in support labour that eats your first six months of profit.
One of the most overlooked levers for improving your MSP EBITDA margin is the way you handle security reviews and client recommendations. At MSP Agenda, we believe that security should never be discussed in isolation from the business.
When you run a structured, clear Security Review, you aren't just "checking boxes." You are doing three things that directly impact your bottom line:
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Project Revenue: You identify gaps that lead to high-margin project work (e.g., implementing MFA, upgrading legacy hardware, or moving to a more secure cloud environment).
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Recurring Revenue: You transition clients to higher-value security tiers, increasing your average revenue per user (ARPU) without significantly increasing your overhead.
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Reduced Risk: A more secure client has fewer breaches and major incidents. Major incidents are "all hands on deck" events that destroy your technical team's productivity and tank your margins for the month.
Luis Navarro realised that the technical team often struggled to explain why a client should care about a specific security risk. By translating technical gaps into commercial risks, MSPs can get faster buy-in for recommendations, leading to a more standardised—and therefore more profitable—client base.
Since labour is the largest expense for any MSP, your MSP EBITDA margin is highly sensitive to how you utilise your team. You should be tracking your "Revenue per Employee." A healthy target for a US-based MSP is typically $200,000 to $250,000 in revenue per full-time equivalent (FTE) staff member.
If your revenue per employee is significantly lower, you likely have an efficiency problem rather than a sales problem. This usually stems from a lack of standardisation. Every time an engineer has to "figure out" a bespoke setup for a specific client, your margin takes a hit. The goal is to make the "right way" to do things the "easiest way" for your team.
Automation isn't just about scripts; it’s about reducing the "human touch" required for repetitive tasks. This includes:
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Automated billing reconciliation to ensure you aren't paying for licenses you aren't charging for.
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Automated patch management and monitoring.
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Standardised templates for Security Reviews and QBRs to reduce the administrative burden on account managers.
Not all revenue is created equal. To maintain a high MSP EBITDA margin, you must focus on the quality of your revenue mix. Investors value recurring revenue (MRR) much more highly than one-time hardware sales or project work because it is predictable and generally carries higher margins.
| Revenue Type | Typical Gross Margin | Impact on EBITDA |
|---|
| Managed Services (MRR) | 45% - 65% | High; provides the foundation for stable profitability. |
| Professional Services (Projects) | 30% - 50% | Medium; great for cash flow but requires high labour utilisation. |
| Cloud/Software Resale | 10% - 20% | Low; adds to top line but can dilute overall EBITDA margin. |
| Hardware Sales | 5% - 15% | Very Low; often a "pass-through" that increases admin work. |
Scroll the table horizontally to see all columns →
If 80% of your revenue comes from hardware sales, your MSP EBITDA margin will likely be in the low single digits, regardless of how hard you work. Successful MSPs treat hardware as a necessary convenience for the client rather than a primary profit driver.
If your margin is currently sitting at 10% and you want to reach 20% or 25%, you don't necessarily need more clients. Often, you need better discipline with the clients you already have.
Every MSP has "Legacy Larry"—the client who signed a contract ten years ago, pays a low rate, but calls the helpdesk every day for issues with ancient software. These clients effectively steal profit from your best clients. You must either raise their rates to reflect their actual support burden or "fire" them to free up your team for higher-value work.
When you support three different EDR tools and four different backup solutions, your team’s expertise is fragmented. By standardising on a single, robust stack, your engineers become experts in those specific tools. This leads to faster resolution times and fewer mistakes, which directly protects your MSP EBITDA margin.
A recommendation that a client doesn't understand is unlikely to become a project. Many MSPs fail to grow their margins because their "Security Reviews" are just technical data dumps. Use a framework that clearly communicates risk and value. When a client says "yes" to an upgrade, you improve their security and your profitability simultaneously.
In the MSP world, waste is uncaptured time, unused software licenses, and forgotten add-on services. Conduct a quarterly audit of your vendor bills versus your client invoices. You might be surprised to find you are paying for licenses for users who left a client’s company six months ago.
You cannot manage what you do not measure. To keep your MSP EBITDA margin on track, you should be looking at your financial statements monthly, not just at tax time. Key metrics to monitor include:
- EBITDA %: Total EBITDA divided by Total Revenue.
- Contribution Margin by Client: Which clients are actually contributing to your profit after labour is accounted for?
- Sales & Marketing as a % of Revenue: High-growth MSPs typically spend 5-10% here; if you spend 20% and aren't growing, your margin is being wasted.
- Utilisation Rate: What percentage of your technical team's time is spent on billable or contract-covered work?
Security is no longer a "nice to have" or a separate add-on; it is the core of the managed service offering. However, it is also a significant cost centre if not managed correctly. If you are providing high-end security services but charging "basic support" prices, your MSP EBITDA margin will suffer.
Luis Navarro’s experience building Totality Services showed that clients are willing to pay for security when they understand the risk. The bridge between a technical vulnerability and a commercial decision is the Security Review. When you make these reviews consistent and easy to understand, you stop being a "utility" and start being a "strategic partner." Strategic partners command higher margins.
In the software and services world, the "Rule of 40" is a benchmark used to evaluate the balance between growth and profitability. It suggests that your growth rate plus your MSP EBITDA margin should equal 40% or more.
For example:
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If you are growing at 30% per year, a 10% EBITDA margin is acceptable.
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If your growth has slowed to 5%, you should be aiming for a 35% EBITDA margin.
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If you are growing at 10% and your margin is 10%, you are in the "danger zone" and need to look closely at your operational efficiency.
This perspective helps MSP owners understand that profitability doesn't always mean stagnation. You can reinvest profit into sales and marketing to drive growth, but you must ensure that the underlying engine is efficient enough to generate that profit in the first place.
It is a mistake to think that focusing on MSP EBITDA margin is "greedy" or disconnected from employee well-being. In reality, highly profitable MSPs are often better places to work. Why? Because high-margin businesses can afford to pay better salaries, provide better training, and maintain a manageable workload for their staff.
Low-margin MSPs are often "sweatshops" where engineers are overworked and under-equipped. By focusing on profitability, you are creating a stable environment where your team can thrive. A team that isn't burnt out provides better service, which leads to higher client retention—a key driver of long-term EBITDA stability.
Many MSP owners get confused by what should and shouldn't be included in their MSP EBITDA margin calculations. Here are a few clarifications:
- Owner Compensation: If you are the owner and you aren't paying yourself a market-rate salary, your EBITDA is artificially inflated. To get a "true" EBITDA, you must adjust your earnings to what it would cost to hire someone to do your job.
- One-Time Gains: Selling a large piece of equipment or receiving a one-off grant shouldn't be counted in your operational EBITDA.
- Depreciation: While depreciation is "added back" to get to EBITDA, you still need to remember that you will eventually need to replace that hardware. Don't ignore capital expenditures (CapEx) entirely.
If you are looking at your MSP EBITDA margin with an eye toward an exit, consistency is key. A buyer doesn't just want to see a 25% margin today; they want to see that you’ve maintained it for the last three years. They are looking for "Quality of Earnings."
This is where standardisation pays off. A buyer will look at your Security Reviews, your client contracts, and your technical stack. If they see a messy, non-standard business, they will apply a "risk discount" to your valuation, even if your EBITDA looks okay on paper. If they see a clean, standardised, and predictable machine, they will pay a premium.
Luis Navarro’s journey to an eight-figure acquisition was built on this foundation. He understood that a business is only as valuable as its ability to repeat its success without the founder's constant intervention. High EBITDA margins are the evidence that your systems are working.
