Let me start with what I mean by “competitive advantage” so you can assume an active role in Clayton Capital Partners process:

When I talk to owners about competitive advantage, I’m talking about the product a company makes or service it offers either better or more cheaply than its competitors—over time. Your company may do something differently than its competitors or it may do or make something more cheaply.  In either case, differentiation or cost leadership must be paired with the ability to sustain that cost leadership or product/service differentiation over time.  Michael E. Porter (a professor at the Harvard Business School) defined the concept, components, and role of competitive advantage in the operation of businesses and even nations.  I will use many of Porter’s definitions as we apply them to positioning your company for success today and to selling it for top dollar in the future. 

In his 2009 letter to Berkshire Hathaway’s shareholders, Warren Buffet wrote that he focuses (in good times and in bad) on four goals, the second of which is “widening the ‘moats’ around our operating businesses that give them durable and competitive advantage.”  Mr. Buffet is not talking here about selling his company; he’s identifying a fundamental principle of running profitable companies today.  Have you thought about the role competitive advantage plays in your company today as well as what role competitive advantage will play in its sale? 

In the context of the eventual sale of a business, we’ve found that companies with a competitive advantage sell for two times the average industry multiple—what we call selling for an “outrageous” price.  (See chart below for some examples of very real companies CCP has sold for outrageous prices.) 

Sale-ability vs. Outrageous Price

I ask you to remember there is a difference between a company that is saleable and one that enjoys a competitive advantage.  In today’s less exuberant marketplace, buyers are making offers only on companies that meet their strict criteria.  First, a company must be worth between $10M and $250M:  large enough to make an impact on the buyer’s bottom line but small enough to finance with cash on hand.  Second, buyers are only interested in companies with strong fundamentals such as excellent management, increasing cash flow, a diversified customer base and strong operating systems.  To attract a buyer today, a company must be operating in a niche industry.  By that I mean it operates in an industry that has not been adversely affected by the current economic crisis.  Finally, to be saleable, a company must play a clear role in the buyer’s plans for growth.  In our experience, only those companies meeting all four criteria are saleable in today’s market. We are happy to tell you if we think your company meets these criteria.   

What difference does a competitive advantage make in a sale situation?

The short answer to this very common owner question is, “As little as twice or as much as four times the prevailing industry multiple.” This chart showing closed CCP deals more dramatically illustrates the affect competitive advantage has on sale price.   

As you can see, each company’s competitive advantage is unique, but they fall into one of two categories:  cost leadership (or low cost) or differentiation. 

Low Cost Competitive Advantage

There are two ways to lower your company’s costs.  The first is to control its cost drivers; the second is to reconfigure your value chain.  A cost driver is any structural factor that influences cost.  A company’s value chain is the linkage of every activity the company engages in as it does business. For example, acquiring resources, operations, marketing and sales, service and distribution to customers would be the largest links in a company’s value chain.  Each of those links would be subdivided into its smallest parts for cost analysis purposes.  

Cost Drivers

According to Michael Porter, there is a host of ways companies use cost drivers to achieve a competitive advantage. These include: 

• Economies of scale
• Learning
• Pattern of capacity utilization
• Linkages
• Interrelationships
• Integration
• Timing
• Discretionary policies
• Location
• Institutional factors

Value Chain

Also as part of the analysis, we will examine each link in your company’s value chain.  Companies that produce a product or deliver a service more cheaply than competitors often have value chains that are quite different from their competitors.  We will look for differences in production processes, automation, sales, and distribution channels to name just a few.  Our goal here is to determine not just if your competitive advantage springs from efficiency in your company’s value chain but to identify the specific link that yields the advantage and to determine if your company has fully exploited that link. 

Differentiation Competitive Advantage

Some companies develop a competitive advantage based on differentiating themselves from their competitors.  Basically, differentiation means doing or producing something better than your competitors.  There are two primary ways companies manage to differentiate themselves.  They do so through making choices about what products or services to produce and how to produce them or by exploiting linkages within their value chains or with suppliers. 

The areas in which your company can achieve a competitive advantage based on differentiation through its choices or through its linkages include: 

• Timing
• Location
• Interrelationships
• Learning and spillovers
• Integration
• Scale
• Institutional factors

Sustainability

When it comes to sustainability, the most important observation is: if your company cannot sustain its competitive advantage over time, it is of little value to you or a buyer. 
 
 

Survey of Buyers

When I talk to business owners about competitive advantage, I ask them to remember the adage, “Beauty is in the eye of the beholder.”  In this context, I remind owners that the competitive advantage they’ve worked so hard to create can be somewhat valuable, very valuable or not at all valuable—depending upon the buyer’s needs or vulnerabilities and how that advantage is leveraged. 

If we uncover your company’s competitive advantage, we will identify buyers who might be willing to pay top dollar to acquire your company’s competitive advantage.  Over the years, large American corporations have retained CCP to identify platforms for their future growth.  By performing the necessary strategic analysis for these companies, we know what corporate buyers look for and how they value competitive advantages. 

Leverage

Not only is it necessary to identify which buyer(s) will benefit most from acquiring your company’s competitive advantage, we must create a unique strategy designed to make the buyer(s) pay top dollar for your company’s competitive advantage.  Strategies vary widely based on your company’s unique competitive advantage and on the specific goals and constraints of the buyers in the marketplace. 

Your Role in this Process

At this point, you may have a good idea of your company’s competitive advantage.  Then again, if you are like most owners I’ve worked with, you do not.  Many have a “gut” feeling for why their customers buy from them, do everything they can to maintain or enhance that motive, but often can’t express that motive in a sentence or even a paragraph.  Too busy running successful companies, most owners just haven’t had the time to examine each element of their success.  Taking that time is absolutely critical both to creating a valuable company and to reaping an “outrageous” sale price. 

Not only must you know what your company’s competitive advantage(s) is, you must understand which buyer it will attract and how to use that advantage to create pain or gain for that buyer.  So, how do you uncover your company’s competitive advantage?  Professor Porter described the following steps—many of which we may take to analyze your company’s unique competitive advantage.