Barriers to entry are obstacles that prevent (or make it more difficult) for newer competitors to join your market. Such barriers enable you to build a protective moat around your business, leading to establishing your business as the market share leader. Research supports the notion that market share leaders garner above average profitability; thus, increasing the value of their companies and making them more attractive to prospective buyers.
Types of Barriers
Intellectual Property
Patents and intellectual property rights restrict access to your market and products making it more difficult for competitors to adapt or gain market share.
Legislative Barriers
Legislation that restricts competition and protects your products or services creates a barrier to entry. For example, a costly and embarrassing lawsuit subsequently settled between a state agency and its plaintiffs led to policy and licensing requirements in the home health care space.
Our client, a major player in the space, leads the state’s task force to develop new policies, regulations and licensing. These legislative barriers, which were needed, established barriers to entry, enabled our client to sell at a premium to an out-of-state strategic buyer. The buyer determined, given the obstacles, it was easier to purchase an existing license holder than starting from scratch.
Cost of Entry
A high cost of entry is one example of a natural barrier, which exists without external pressure. For example, once a very fragmented business, cellular providers have consolidated to just a handful of operators. No new operators have or will enter the market due to the cost to compete.
Brand Loyalty
You can create brand loyalty by delivering on your promises, staying committed to your customers, and becoming well-known in your space. Customers that are “locked-in” and truly loyal to your brand will not want to switch to a new competitor.
Innovation
Continuously investing in more innovative ways to enhance your product or service that the customer perceives as beneficial will generate brand loyalty and keep your customers invested in your brand.
Institutionalized Knowledge
Knowledgeable employees can create barriers to entry, particularly in esoteric industries. The knowledge base may be challenging to obtain in the open market, thus creating a knowledge barrier to entry.
Switching Costs
Creating a product or service that integrates well with clients makes switching to a competitor expensive or impossible – building a competitive barrier to ensure a long-term customer base and an enhanced enterprise value.
Creating barriers to entry can help enhance your company’s value at any stage. ACT Capital Advisors has been working with businesses in various industries since 1986, developing strategic plans before they go to market to ensure they get the best value possible.
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