Why defining the barriers to entry is important to a business looking to sell
When it comes to selling a business, it’s important to define to potential buyers the competitive advantage it has over other firms. Clearly a prospective acquiror will want to understand the advantage they would be gaining in a new market by buying the company, as opposed to the option of setting themselves up as a competitor to that business.
A barrier to entry can be one such advantage, and in many cases, these are not related to traditional definitions such as brand, intellectual property or monopoly.
By understanding the business’ unique barriers to entry, business owners will be better placed to articulate the value to prospective buyers and protect their own interests in a negotiation. They need to consider – creatively and fully – the business’ individual proposition that stands them apart.
Often, a business’ barrier to entry is based around a combination of offerings to their customers. It may be around the personal relationships developed with clients or may focus on their current or future legally binding contacts. It may be that no one party can reach them in terms of scale, or conversely that the business addresses an area of the market that is not valuable enough for a large scale corporate to seek to enter.
The skill in considering this topic and demonstrating the maximum value of their business is for owners to think creatively and articulate something robust, even if this may not formally ‘exist’ in the traditional sense.
What is the definition of barriers to entry?
Barriers to entry is the term given to the existence of obstacles preventing new competitors from easily entering a market. Such obstacles might include high start-up costs, difficulty associated with establishing a new brand in a market, regulation enforced by government bodies, patents associated with technology needed to launch a new company or simply the size and scale needed to operate profitably in a market.
This article is part of our Insights Spotlight series for entrepreneurs & business owners.