Barriers to Entry

When evaluating a business investment, one of the many factors for making a decision should be whether or not your future business is going to be unique. Can it be started by anyone, or is there something that keeps others from opening up the same type of business across the street, or even next door.

Lots of people call me to purchase a service business. One of these service businesses that attract attention are pool services. In Florida, if you own or rent a home with a pool, the pool will need regular service, otherwise, it will turn green. People hire pool service contractors to prevent this from happening. Overtime they learn what it takes to maintain the pool, and after a while start to service their own. Pretty soon they are offering the service to their neighbors and relatives. The next thing you know, they want to buy a neighborhood route from a pool service company.

The business itself is relatively easy, but it's time consuming and not very profitable if all you do is service pools. A license for servicing is not hard to get, but, as you will find, the real money is in parts and repair, and therein lies the 'rub.' In Collier and Lee Counties, in Florida, to get a license, it requires two years experience of pool service and repair, which must be proven or vouched for by other licensed persons. After completing the experience requirement, you must pass a difficult test. If you want to repair a pool pump or pool heating system, you need this license. This is a sample of 'barriers to entry.' If you are willing to scale the barriers, then you will have less competition.

If you are thinking of opening a business, then something unique and difficult will make it less attractive to competitors. When entry barriers are high more people will be reluctant to enter that type of business.

If you are successful, eventually others will want to feed off of your success by opening something near you. Why do you think there's a Walgreens and CVS Pharmacy on opposite corners of major intersections. The sad truth is, profitable markets that are successful will attract new competition. More competition will indeed increase traffic, but most likely decrease profitability. If you pick a shopping center where you can write some sort of exclusivity for your particular type of business, then you certainly should. That is another example of a 'barrier to entry.'

Business is hard enough without having competitors nipping at your customer base. If there are barriers to entry, you can hold them off long enough to recapture your investment and make a good profit. Good luck. Call me if I can help you.