Buyers are looking for long-lasting competitive advantages. The goal is to identify a unique combination of valuable services that sets you apart from everyone else in the market.
Keep Widening Your Moat
When selling a business, one of the qualities buyers look for is barriers to entry. The harder it is for someone to enter your market or take away your customers, the bigger the barrier. Warren Buffet often refers to this as a moat.
“In business, I look for an economic castle protected by unbreachable moats,” Buffet says. “If you have an economic castle, people are going to come and want to take that castle away from you. You better have a strong moat.”
The idea of a moat refers to how well your company can keep competitors at bay. Buyers see long-term value in wide moats. The stronger the moat, the more confidence buyers have that your cash flows won’t be diminished by competition over time.
How to Gauge Your Competitive Advantage
One way to gauge the strength of your moat is by identifying your unique selling proposition. The aim is to have what we call three uniques. For example, if you make widgets, perhaps you’re one of only a few manufacturers who can fabricate them out of carbon fiber. You may also offer short-run manufacturing, or maybe you provide widget engineering support for a customer’s research and development work.
The goal is to identify a combination of unique, valuable services that set you apart from everyone else in the market. There may be a limited few who can claim two of your uniques, but the aim is that no one else can claim all three things you offer your clients. Identifying your three uniques will show the buyer that you truly have something special — something difficult to imitate and proprietary to your business.
As you evaluate your business from year to year, ask yourself whether your three uniques still hold up. Has your competitive advantage gotten stronger or weaker compared to the previous year? To buyers, this can be a more important indicator of future value than your revenue or profit alone.
What Business Buyers are Looking For
Buyers are looking for long-lasting competitive advantages. Even if your business is having record sales, you need to focus on how you are widening your competitive moat.
As Buffet said, “We tell our managers we want the moat widened every year. That doesn’t necessarily mean the profit will be more this year than it was last year — because sometimes it won’t be. However, if the moat is widened every year, the business will do very well. When we see a moat that’s tenuous in any way — it’s just too risky.”
When it comes to selling your business, any perceived risk lowers its value. Lower the risk. Build wider moats. Bring more buyers to the table.
