What Does Barriers to Entry Mean?
Barriers to entry refers to any significant obstacles facing a new entrant into an existing company's market. Both strategic and financial buyers look to acquire companies with high barriers to entry because they are difficult to build internally and they keep competition limited, allowing for higher pricing power. Companies that can demonstrate significant barriers to entry will usually garner a valuation premium from acquirers.
Divestopedia Explains Barriers to Entry
Barriers to entry broadly fall into three categories;
- Legal or regulatory barriers include agreements, contracts, patents, trademarks, copyrights and/or regulatory protection. Vendors should clearly define the protection and the extent of the protection.
- Market barriers include brands, customer/supplier relationships, distribution channels, trade secrets, exclusive agreements, location, etc. Vendors should document how they created these market barriers and how they will protect them.
- Capital barriers include significant investments in fixed assets, high costs for regulatory certification, extensive research and development, etc. Documentation of all aspects of capital required for new entries into the marketplace will provide proof of these barriers and will go a long way toward obtaining a premium valuation from a buyer.