One of the most important questions I ask myself when evaluating a business is: Does this company have real competitive advantages, or is it just surviving on momentum?
When I first started buying businesses, I underestimated how critical this question was. I looked at revenue, margins, and customer lists, but I didn’t always dig deeply into what made the business defensible. Over time, I realized that numbers alone can mislead me. A company might look profitable today, but crumble tomorrow if it doesn’t have true advantages that separate it from competitors.
In this article, I’ll share how I judge whether a business has real competitive advantages, the mistakes I made in overlooking them, and the framework I use today to evaluate defensibility before I buy.
Why Competitive Advantage Matters
Revenue and profit tell me about the past. Competitive advantage tells me about the future. Without a moat or a defensible edge, the company’s success can easily be eroded by new entrants, bigger players, or changing markets.
A real advantage gives me confidence that:
- Customers will stick with the business even if competitors knock on their door.
- Margins can be preserved without a race to the bottom on price.
- Growth opportunities aren’t immediately undercut by copycats.
When a business has no advantage, I’m essentially buying a commodity, and that’s a dangerous game.
The Mistake I Made Early
In one of my early deals, I bought a company that looked great financially but had no real moat. It offered services that dozens of competitors could replicate with ease. For a while, revenue held steady, but as soon as competitors undercut pricing, customers started leaving.
That experience taught me to never confuse profitability with defensibility. A business can be profitable without being defensible, but that profitability won’t last.
The Types of Competitive Advantages I Look For
Over time, I’ve developed a checklist of advantages that matter most. When I evaluate a business, I look for at least one of these, ideally more.
1. Brand Loyalty
If customers strongly identify with the brand and trust it over alternatives, that’s a powerful moat. I look at repeat customer rates, referrals, and how much goodwill exists in the marketplace.
2. Proprietary Systems or Processes
Some businesses have unique methods, technology, or intellectual property that competitors can’t easily copy. Even a well-documented proprietary process can be a strong edge if it delivers better results than industry norms.
3. Contracts and Recurring Revenue
Multi-year contracts or recurring revenue streams lock in customers and create stability. These agreements make it harder for competitors to poach clients and give me confidence in future cash flow.
4. Customer Relationships
In smaller businesses, relationships can be moats. If the company has decades-long ties with customers, and those relationships run deep, competitors struggle to break them.
5. Scale or Market Position
Sometimes the advantage is scale. A company may buy inventory at a lower cost, deliver services more efficiently, or dominate a geographic region simply by being the largest and most trusted provider.
6. Switching Costs
If it’s painful or costly for customers to switch providers because of data migration, retraining, or operational disruption, that’s a hidden moat.
7. Reputation
In certain industries, reputation is everything. A track record for quality, safety, or reliability can be nearly impossible for a competitor to replicate overnight.
Questions I Ask to Judge Defensibility
When I evaluate an acquisition, I don’t just accept “we’re the best in town” as proof of advantage. I dig in with specific questions:
- Why do customers choose you over others?
- What keeps them from leaving?
- If a competitor offered the same product at a 20% discount, would customers stay?
- What do competitors say about you?
- What unique capabilities do you have that others don’t?
The answers to these questions reveal whether the advantage is real or imagined.
Red Flags That a Business Lacks Moats
There are also signs that a business doesn’t have real advantages:
- Heavy reliance on the lowest price to win customers.
- Customers who switch easily between providers.
- No recurring revenue or long-term contracts.
- High employee turnover erodes customer relationships.
- Commoditized products with no brand recognition.
If I see too many of these, I know the company is vulnerable.
How I Weigh Advantages Against Risks
Not every business I buy has world-class moats. Sometimes the advantage is modest but still meaningful. The key is weighing the strength of the moat against the risks of competition.
For example, a company with loyal long-term customers but no contracts can still be defensible if the loyalty is deep enough. A company with contracts but a poor reputation, on the other hand, might be riskier than it appears.
Why Culture Itself Can Be a Moat
One advantage that often gets overlooked is culture. A strong culture creates loyal employees who deliver consistently great customer experiences. Competitors can copy products, but they can’t easily copy culture.
I’ve bought businesses where culture itself was the advantage, and that edge proved more durable than any single product or contract.
Mistakes I’ve Made With Competitive Advantage
I’ve made mistakes in overestimating advantages. In one case, I assumed brand loyalty was strong, but in reality, customers were loyal to the owner, not the company. When the owner left, loyalty evaporated.
I’ve also underestimated small advantages. I once thought a business’s geographic dominance was minor, but it turned out to be a huge moat. Competitors simply couldn’t penetrate the market because of entrenched relationships.
These mistakes taught me to test every assumption about advantages rather than taking them at face value.
Why Competitive Advantage Drives Valuation
Strong advantages don’t just create stability; they increase valuation. Buyers (including me) are willing to pay more for businesses that are defensible. That’s why recurring revenue, contracts, and brand loyalty often command higher multiples.
If a business has no moat, I factor that into my offer and often walk away. If it has strong advantages, I’m willing to invest more confidently.
Final Thoughts
When I evaluate a business, I don’t just ask how profitable it is today, I ask how defensible it will be tomorrow. Competitive advantage is the difference between a company that weathers storms and one that collapses under pressure.
That’s why I judge advantages carefully, asking hard questions about loyalty, contracts, systems, and culture. If I see true moats, I know the business is worth pursuing. If I don’t, I move on.
Because in acquisitions, it’s not just about buying revenue, it’s about buying durability.
I continue sharing my lessons on acquisitions, private equity, and real estate strategy at DrConnorRobertson.com, where I document the frameworks I use to evaluate and grow businesses.