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Enhancing Value: Create Barriers to Entry

Posted by David Humphrey on 18 March 2014 | Comments

What stops someone else from competing with you?  Unless you are in the liquor store industry with limited licenses granted by the town fathers or have long term contracts with your customers, this question is a critical for most buyers.

Licenses and contracts are far from the only protection.  Patents can hold competitors at bay and help create product differentiation.   So can innovative equipment, which enables the company to make product faster, larger or smaller than many of the competitors. 

This capability difference for specialized product sets the company apart and helps retain customers when an upstart offers a lower price on a common item.  Territory can be a barrier as well.  The ability to service accounts quickly and efficiently with an exclusive product can make it difficult for a new rival to edge their way into your marketplace.

Now, barriers are not cheap – legal cost for patents and labor costs for same day service or rent for a warehouse to provide faster response all cost money. From a value standpoint, these costs should be weighted against the value of repeatable sales and the potential increase in the value of the business to determine the true cost benefit of these barriers.