Building a Moat
Differentiation That Drives Multiple Expansion
What sets two companies apart
Two nearly identical companies are on the market. Same revenue. Same EBITDA. Same industry. Yet one attracts a bidding war while the other struggles to get a single serious offer. What separates the two isn’t luck or timing.
It’s the invisible barrier known as a moat.
I recently met a founder who built a specialty manufacturing firm with only modest year-over-year growth. His competitors dismissed him as “too niche.” When he decided to sell, the outcome shocked them. Strategic buyers paid nearly 9x EBITDA (far above the 4–6x average) because his company controlled a proprietary process no one else could easily replicate. His differentiation wasn’t flashy; it was defensible. That moat doubled his exit value.
Most owners underestimate how fiercely buyers scrutinize defensibility. They’ll pour over financials and operations, of course, but what they’re really hunting for is leverage: unique capabilities, sticky customers, or brand equity that competitors can’t easily steal. Without a moat, your company is just another castle on an open plain: easy to invade, easy to discount.
The brutal truth
Incremental improvements rarely move multiples. Buyers aren’t excited by “slightly better” operations; they pay premiums for structural advantages. Think patents, exclusive supplier contracts, a cult-like customer community, or a proprietary dataset. These are not just features of the business. They are economic fortresses.
Buyers don’t pay premium multiples for past performance. They pay for the future they can protect.
The good news is that moats can be built deliberately. I met with a software founder who initially competed on price. She shifted strategy to embed her product deep into customers’ workflows, making it painful to switch. Churn dropped to near zero, recurring revenue surged, and within 18 months his valuation multiple expanded from 3.5x to 7x. She didn’t invent a new technology; she engineered stickiness.
Skeptics argue that moats are temporary. Markets evolve, patents expire, customer loyalty fades. That’s true, but a well-built moat buys time and bargaining power. In M&A, time is value. A buyer who believes your advantage will endure even three to five years will pay a premium today.
If you’re an owner thinking about an eventual exit, the takeaway is clear: start moat-building now. Identify what truly sets you apart, invest in assets competitors can’t quickly copy, and document the proof. Proprietary data, exclusive contracts, unique culture are not “soft” factors. They’re hard currency when buyers calculate multiples.
Building a moat isn’t just about selling for more money. It’s about creating a business that thrives regardless of market noise. Whether you sell next year or never, a strong moat gives you leverage with partners, investors, and even talent. And when the time does come to exit, you’ll discover that differentiation doesn’t just attract buyers. It makes them fight to own what you’ve built.
So ask yourself: if a buyer knocked today, what would stop your competitors from offering the same thing tomorrow?
David Hermann, CEO of hermanngroup and M&A Advisor/Broker at Sunbelt Business Brokers of Colorado
David Hermann is a transformative advisor and strategist who turns complex business challenges into extraordinary successes. Known for driving over $500 million in documented financial improvements for clients, David partners with C-suite leaders to unlock their full potential. With 60+ speaking engagements, numerous publications, and a spot in the top 1% of Consulting Voices and top 1% of the Social Selling Index on LinkedIn, he’s passionate about making strategy, change leadership, and operations insightful and accessible.