How barriers to entry can help you sell your business
How hard it would be to build your business again from scratch? Defining the barriers to entry could help you sell your business.
When it comes to selling a company, it’s important to be able define the competitive advantage the business has over other companies in the same sector. If a buyer feels they could build a similar business organically, they may not pursue the acquisition.
In this context, showing that there are significant ‘barriers to entry’ in your market can represent a powerful advantage.
Put simply, barriers to entry are the obstacles that would be faced by any new company trying to establish themselves within a given market. Classic examples include prohibitive set-up costs, the intellectual property of the incumbent market players, a lack of brand awareness, and the burdens of regulation.
Having a clear understanding of barriers to entry can help build the business case for a strategic acquisition, and ultimately increase the valuation of a company. As such, it’s a good idea for business owners to take time to think through exactly what sets their business apart and makes it hard to replicate.
Often, a business’s barriers to entry are based around an established range of products and services with strong client relationships and limited churn. Bigger companies may benefit from economies of scale, making it impossible for smaller new entrants to compete on price. Conversely, companies may be servicing a niche market that is protected from competition because big players are not seeking to enter it.
To really build the case for a generous valuation, business owners need to think creatively about barriers to entry and be able to articulate them clearly and convincingly to any prospective buyer.