In today’s market, buyers are far more likely to take their time on due diligence and even more time deciding on just the right business to buy. They’re more thoughtful and careful currently, so polishing your value drivers before you go to sell is the smartest move you could make before you go to sell.
One of the preeminent value drivers is creating barriers to entry. Dig a mile-wide moat around your business to ensure you have little to no competition and you could score yourself the price of a lifetime. More barriers mean less competition, thus a higher value for your business. It also means more profit and less risk for a potential buyer.
Though less risk equals a higher sale price, building barriers around your business doesn’t cost you anything, especially if you do so from day one. As George J. Stigler said, breaking the barriers you erect is the financial burden of a new entrant.
“[It is the] cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.”
All these barriers serve the same purpose as a coral reef: to protect the power, revenues, and profits of existing businesses. By creating barriers, you automatically make it harder for a newcomer to challenge your business, thus your power and profit. With less challenge and competition, you can charge well above average in the long term, so when you go to sell, you can leverage this to boost your value and lessen the buyer’s risk.
And just as with keeping good financial records, keeping organized and up-to-date documentation of everything required of new entries to break into your marketplace will offer proof of these barriers and will go a long way toward getting a premium price from a buyer.
Simply put, barriers to entry are any obstacle you can put in the way of a new or potential entrant in your niche. Though those barriers can take many forms and perhaps fall into just as many categories, they can generally be grouped into 3 categories: legal or regulatory, market, or capital.
“Both strategic and financial buyers look to acquire companies with high barriers to entry because they are difficult to build internally and they keep competition limited, allowing for higher pricing power.”
Knowing that what exactly constitutes a barrier to entry? What can you do to limit competition and drive up your profit? While businesses can imagine and create limitless varieties, barriers tend to fall into the 3 aforementioned categories and can be created naturally, by governments, or by businesses themselves. Here’s a consolidated list of examples:
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When you build that wide moat around your business, you could very well find that those barriers that give you a cost advantage quickly begin to create a disparity in costs between your business and that of an emerging business trying to enter your sphere.
Because you’ve managed to make it difficult and costly for anyone else to compete with you, your business winds up owning most, if not all, of the market share, thus turning your business into a monopoly. This allows you in turn to continue to keep new players from entering the market by simply lowering your prices temporarily so your current customers stay with you and new customers come to you, the long-time player, rather than the new entrant.
“Barriers to entry will make the market less competitive. If barriers to entry are very high, then the market will invariably become a monopoly.”
Once the new player gives up due to the overwhelming costs of competing, you can safely raise your prices back to normal again, ensuring both your profits and your position. It’s much like mountain goats battling for supremacy: they ram heads until, generally, the younger goat takes too many losses and walks away, leaving the older goat to revel in its dominance.
Barriers reduce and eliminate competition, negating perfect competition in your market and creating a monopoly. For example, it’s nearly impossible to successfully break into the pharmaceutical or software industries because of the protection of intellectual property. It’s just as hard to enter into and compete in the water and energy industries because of existing governmental regulations.
Creating effective barriers to entry is the ideal strategic business tool. If your goal is to demand a superior price for the sale of your business, develop an early understanding of what constitutes a barrier to entry, or a moat around your business, to keep competition minimal.
There are an endless variety of barriers you can invent, depending on your business, and they act as a deterrent to new competitors who could threaten your standing and profits. Types of barriers can include anything from exclusive contracts with large entities to patents to the sole control of a natural resource. With enough barriers or a large enough barrier, in place, you could even create a monopoly for yourself, making your business enormously appealing to any buyer.
The next best move you could make to get the best price for your business is to hire a merger and acquisitions expert. It shows you’re serious about selling your business and not just testing the waters. They can also help you discover ways to make your business yet more attractive to a buyer because they know exactly what a buyer wants.
Muise Mergers & Acquisitions Inc. is an expert you can trust to find matching buyers for your business and negotiate successful terms. Call them now at (902) 456.6473 or send them an email and get the most for your business.
Muise Mergers & Acquisitions, We also assist business buyers and sellers in the following Canadian provinces, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia. Copyright©2024
Our business was founded in 1998 by Maurice (Moe) Muise. Our team has extensive experience in facilitating the sale of virtually any type and size of business, including manufacturing operations, distributorships, retail, and all forms of service businesses
