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  • Writer's pictureEric Williams

Competitive barriers to entry increase business marketability

Businesses with low barriers to entry for competitors tend to be worth less than businesses with high barriers to entry. To the extent that you can create barriers to entry in your business it may make it more valuable and easier to sell. What is a competitive barrier to entry? Anything that makes it harder for a new competitor to enter the market and compete with your business. Examples include:

1. Hard-to-get expensive equipment, or other high start-up costs.

2. Economies of scale & high fixed operating costs.

3. A heavily regulated industry with high compliance costs.

4. Dependence on difficult-to-replace, highly-trained staff with specialized knowledge.

5. Companies that utilize or sell items with registered intellectual property protection.

6. Businesses with processes, systems, or formulations that, while not necessarily patented, would be difficult for a competitor to duplicate or reverse engineer.

7. Supplier contracts in place that grant an exclusive territory, or offer better terms than would be available to a new market entrant.

8. Facilities, equipment, processes, or other characteristics that have been legally grandfathered providing an advantage over new market entrants. For example, perhaps a business has unusually large signage because it has been in place for the past 30 years, but now sign ordinances would prohibit or restrict the size of signage.

9. A well-established, highly-regarded brand with loyal repeat customers or recurring revenue. Consider Coca-Cola as an example. If someone were to create a new cola beverage that beat Coca-Cola repeatedly in taste tests and the inventor spent $1 billion dollars on advertising, they would likely still have a difficult time out-competing Coca-Cola due to Coke's many decades of branding, marketing, and advertising. On a local level, an example may be a 2nd generation commercial building contractor that everyone knows about and has a reputation for high integrity and quality construction, backed by a high customer ratings and reviews.

For some businesses / industries the barriers to entry may be natural - for example, a medical device manufacturer must get FDA approval and that's a barrier to entry that the business didn't choose, but it nonetheless is in effect. However, there may be some ways to create barriers to entry - for example:

A. Develop proprietary systems and tools that give the business a competitive advantage.

B. Have new employees sign non-solicit agreements and possibly non-compete agreements, so it will be more difficult for new market entrants to recruit your employees and have them bring your customers with them. Seek legal advice on this so that they are enforceable.

C. Register intellectual property when possible including trademarks, patents, and copyrights.

D. Establish contracts with customers that provide them with incentives to use only your products or services and / or that have high switching costs for cancelling the contract to discourage defection to new market entrants.

E. In some industries, it may be possible to get regulators, industry associations, or end users to specify your products or services in such a way that it would be difficult for competitors to offer a product or service that fits the specifications.

F. Create highly differentiated products or services and/or continually launch new products.

G. Find ways to reduce cost of goods sold and operating expenses enough that a lower price can be offered while maintaining a similar profit.

Generally, the more differentiated and less of a commodity your business' products and services are, the more difficult it will be for new market entrants to compete.

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