When it comes to mergers and acquisitions, one of the key factors that an investor looks for in an M&A opportunity is a business with high levels of predictability in recurring revenues. Oftentimes, these buyers will prefer to invest in businesses possessing exclusive assets. These assets create barriers to entry which aids in long term profitability by helping to prevent competitors from breaking into the market.
Recurring revenues can be attributed to many aspects of a business, including, but not limited to, proprietary products or designs, long term contracts, exclusive distribution rights, etc. Other attributes that investment bankers seek out are products or services that are needed, thought by customers to have no close substitute, and are not subject to pricing regulations. These conditions allow a company to aggressively price their product, thereby earning higher returns. For example, George and Company recently sold a business in which the owner acquired nearly all the old stock parts for antique automobiles of a particular manufacturer, thereby giving the business owner barriers to entry. Not only were the parts in demand, but there were few (if any) other suppliers in the market who had access to these parts. The business owner was able to price the parts beyond what another manufacturer’s parts might sell for, due to a scarcity of parts in the marketplace. It’s the age-old law of supply and demand.
Barriers to Entry
When a company holds a distinct attribute, giving its product or service superiority in the market because it cannot be easily copied, a barrier to entry is formed. While innumerable circumstances exist, several examples of barriers to entry include patents, superior products/services, competitive low costs, long term contracts, unique knowledge, and distribution advantages. Barriers to entry work to prevent competitors from “breaking in” to the particular market and taking away customers and recurring revenues. In summation, a business possessing a product or service with distinct value to customers will, in all probability, hold a successful monopoly in the long-term market, and will be of more value to investors.
If a business is looking to create barriers to entry, it is important that the company constructs a brand known for excelling in its industry. These barriers to entry protect revenue streams, profitability, and market share. Furthermore, in building barriers to entry, a business should invest in markets that are predicted to grow. In this regard, it is important to note that it can often be challenging to predict the future in swiftly changing markets, such as technology, where certain products or services can shift dramatically over the duration of a few years. Consequently, a business with long-term proof of revenue growth and successful barriers to entry is typically the most attractive to prospective buyers. Barriers to entry that escalate over time are the most valuable.
Growing Barriers to Entry within Your Business
There are multiple ways in which to create barriers to entry to help your business become the vanguard of your industry. We have outlined four of the most important ways to create barriers to entry below:
Tip #1: Become a leader in the market and secure customers before competitors are able to replicate your technique. Selecting and improving one “secret recipe” for success is more valuable than attempting to cover every aspect of a niche market.
Tip #2: Generate customer loyalty in order to obtain repeat customers and gain referrals. Always ensure that you “go the extra mile with a client” and create a warm relationship and reputation.
Tip #3: It goes without saying that one of the best ways to win over your customers is through a low price. A low cost negotiated through long-term contracts can help to eliminate your competitors.
Tip #4: It is of paramount importance to protect all intellectual assets through patenting and copyrighting.
If your business has barriers to entry, the value of your company will prove to be exponentially higher and will aid in the sale of your business. To learn more about selling your business, please confidentially contact one of George & Company’s M&A intermediaries. We would be happy to help you in the confidential appraisal, sale, and financing of your business.