Should I be worried if the seller can't explain a drop in margins from year to year?

Yes, this is worth pressing on rather than accepting a vague answer. Margins can genuinely decline for benign reasons — a one-time cost increase, a temporary pricing decision, changed input costs across an industry — and a seller who can explain the drop clearly, with supporting numbers, has usually just had a normal bad stretch. What should concern you more is a seller who can't or won't explain it specifically, since an unexplained margin decline can also point to underlying issues like rising costs the business hasn't been able to pass on to customers, quiet discounting to retain customers who'd otherwise leave, or increasing competitive pressure that's eroding the business's position.

An unexplained trend also matters for valuation specifically: a business priced based on its historical margins, when those margins are actually deteriorating for a real underlying reason, is being overvalued relative to where it's actually heading, not just where it's been.

Ask for a specific, numbers-backed explanation of any material margin change, and have your accountant test whether that explanation actually accounts for the size of the drop. A Treadstone business lawyer can help you use an unexplained trend to justify price adjustments or additional protections.