In the world of M&A, one question frequently guides the decision-making of sophisticated buyers: “What protects this company from competitors?” That’s where the idea of a competitive moat comes into play. It’s not just a metaphor — it’s a critical business feature that impacts valuation, risk tolerance, and long-term growth.
I’ve seen firsthand, both as an operator and now as a principal at Button Holdings and cohost of the Legacy Advisors Podcast, how moats impact deal structure, pricing, and buyer enthusiasm. In this article, I’ll walk you through how to understand, build, and communicate your moat — and why it’s one of the best investments you can make to drive enterprise value.
What Is a Competitive Moat?
A competitive moat is a unique advantage that protects a company from erosion by competitors. Just as a medieval castle’s moat deterred attackers, a business moat helps safeguard margins, market share, and customer relationships.
But not all moats are created equal. The most valuable ones are durable, difficult to replicate, and obvious to buyers. Moats are the difference between a good business and a great, sellable business.
Why Moats Matter in M&A
When we evaluate acquisition targets, one of the first things we ask is: “What makes this business hard to compete with?” That’s not just philosophical — it’s financial.
A strong moat leads to:
- Higher EBITDA multiples
- Reduced perceived risk
- Better deal structures (cash up front, less earnout)
- Easier integration post-acquisition
- Loyal customers and sticky revenue
In M&A, buyers pay for certainty. A moat provides it.
Types of Moats That Drive Valuation
Let’s break down the most compelling types of moats I’ve seen in deals we’ve evaluated, closed, or passed on. Some of these may overlap — in fact, the best businesses usually have multiple moats working together.
Brand Authority
A recognizable and respected brand creates a psychological moat. Customers trust you. They don’t second-guess prices. They recommend you.
Take one deal I was involved in with a regional fitness franchise. It didn’t have the biggest footprint, but it had a fanatical local following. The logo was on bumper stickers. Customers had tattoos. That kind of brand loyalty translates directly into pricing power and recurring revenue.
Key drivers:
- Consistent messaging and positioning
- Customer loyalty programs
- A visible founder or spokesperson
- High social proof (testimonials, media, awards)
Proprietary Technology or Processes
If you own something others can’t easily replicate — code, formulations, patented processes, or even workflows you’ve spent years refining — you’ve built a moat.
I’ve worked with SaaS companies where the secret sauce wasn’t flashy AI, but a niche automation layer that no one else had nailed. That backend advantage allowed them to serve clients faster and more profitably — and it was a huge driver of acquisition interest.
Key drivers:
- IP (intellectual property) filings
- Documentation of processes
- Platform architecture
- Team members responsible for innovation
Switching Costs
Making it hard for customers to leave — in a good way — is one of the most underrated moats.
We closed a deal recently in the B2B logistics space. What impressed us most was how intertwined the company’s software and services were with their customers’ internal systems. Leaving would’ve required months of retraining and lost productivity.
Key drivers:
- System integrations
- Long-term contracts
- High data migration difficulty
- Custom workflows or API dependencies
Network Effects
This is the holy grail. The more people use your product or service, the better it becomes — and the harder it is for someone to compete.
I once helped a client who ran a niche hiring platform for skilled trades. Every new contractor or employer added to the platform increased its value to the rest. By the time they reached 50,000 users, competitors were irrelevant — not because the product was better, but because the network was unbeatable.
Key drivers:
- Marketplace or community dynamics
- User-generated content or reviews
- Viral loops
- Organic referrals
Operational Excellence
This is less sexy but incredibly real. Being the most efficient operator in your niche is a moat — especially in low-margin industries.
We passed on a warehousing company recently not because it was unprofitable, but because their margins were razor-thin and operations were easily replicable. Compare that to a similar company that had automated inventory, predictive restocking, and a hybrid last-mile delivery strategy. That’s a moat you can scale.
Key drivers:
- Lower cost of goods sold
- Faster turnaround times
- Optimized labor models
- Supply chain integration
Regulatory and Compliance Positioning
Sometimes, the moat isn’t how you do business — it’s that you’re allowed to do it and others aren’t.
I once worked with a fintech startup that had secured state-level approvals other firms couldn’t touch. Those licenses took 18–24 months to obtain, and buyers were willing to pay a premium for immediate market access.
Key drivers:
- Licensing or permits
- Compliance frameworks
- Certifications or audits
- Government partnerships
How to Build Your Moat
Now that you understand the types of moats, here’s how to strategically build and fortify them. Think of this as your roadmap for maximizing valuation and buyer demand.
Start with Self-Awareness
Ask your team — and your customers — “Why us?”
Document honest answers. Identify what’s unique, sticky, or irreplaceable.
Invest in Defensibility, Not Just Growth
Growth is attractive. But growth without defensibility is a treadmill.
Buyers want moats, not just marketing spend.
Examples:
- Instead of just hiring more salespeople, build a CRM automation layer
- Instead of chasing awards, build a referral engine tied to loyalty rewards
- Instead of simply adding features, deepen integration with your users’ workflows
Document What You’ve Built
Even the strongest moat is worthless if buyers can’t see it.
In due diligence, we often look for:
- Onboarding workflows
- Client success metrics
- IP documentation
- Customer tenure stats
- Legal protections (contracts, trademarks, etc.)
Make It Founder-Independent
This is personal. In our podcast and in my deal experience, I often talk about “founder risk.” If your moat lives in your head, it’s a red flag.
Buyers want repeatability. Your advantage should survive your exit.
Solutions:
- Train second-tier leaders
- Systematize processes
- Build a knowledge base
- Decrease customer reliance on you personally
Real-World M&A Insight
At Button Holdings, we’ve acquired companies across verticals — digital agencies, B2B SaaS, logistics, niche service firms. The deals that excited us most were moat-first businesses. I’ll give you two contrasting examples from recent experience:
Company A was growing 40% year over year but had no contracts, no tech IP, and a founder who managed all key relationships. Pass.
Company B had flat growth but owned a proprietary algorithm that every customer relied on to forecast demand — and switching to a competitor would’ve cost each customer 6–12 months of ramp time. We paid a strong multiple and structured the deal favorably for both sides.
The lesson? Growth can be bought. Moats must be built.
How Buyers Evaluate Moats
From a buyer’s lens — especially in the lower middle market — we look at five core questions:
- Is the moat real or narrative? (Show me, don’t tell me.)
- How long will it last without reinvestment?
- Can it scale with revenue?
- How easily could a better-funded competitor erode it?
- Is it priced into the current valuation or upside optionality?
If your answers are strong, you’re in a powerful position.
Moats and Multiples
Let’s talk numbers. Companies with strong moats often trade at:
- 25–50% higher EBITDA multiples than commoditized peers
- Better earnout and holdback terms
- Faster close timelines due to buyer confidence
- Improved lender terms in leveraged buyouts
Why? Because moats reduce downside risk. They give acquirers confidence in continuity and scalability — the two holy grails of M&A.
Final Thoughts
Building a competitive moat isn’t just about increasing your margins or closing more deals. It’s about protecting what you’ve built, commanding premium valuation, and ultimately, engineering a more favorable exit.
My advice to founders, operators, and would-be sellers is simple:
Don’t wait until exit planning begins to build your moat. Start now.
Your future buyer — and your future self — will thank you.
If you found this helpful, listen to our episode on “Building and Valuing Moats” on the Legacy Advisors Podcast, where Kris and I go deep into real-world examples, lessons from failed deals, and actionable takeaways.
You don’t need to be a castle to have a moat — but if you plan to sell, you better have a wide one.
Frequently Asked Questions
What exactly is a competitive moat and why is it important in M&A?
A competitive moat is a strategic advantage that protects a company from its competitors — think of it as a barrier that makes it difficult for others to take market share, copy the business model, or erode profit margins. In the context of mergers and acquisitions, moats are vital because they directly influence a company’s valuation and buyer interest. Buyers aren’t just purchasing assets or revenue; they’re buying stability, predictability, and defensibility. A company with a wide, sustainable moat is less likely to see sudden revenue loss or customer churn, making it a safer and more attractive investment. Ultimately, moats reduce perceived risk and increase acquisition multiples.
How can small or mid-sized businesses build competitive moats without massive resources?
While large companies may use patents or billion-dollar brand campaigns to build moats, small and mid-sized businesses can create powerful moats through process discipline, customer intimacy, and operational focus. For example, a boutique B2B services firm can embed itself deeply in clients’ operations, making switching painful. A software company can build customized features that cater to niche verticals. A local business can dominate Google search rankings and earn hundreds of five-star reviews. Moats don’t have to be flashy — they just need to make your business stickier, smarter, or harder to replicate than your nearest competitor. The key is deliberate planning and execution.
What’s the difference between a growth story and a moat story, and which do buyers value more?
A growth story focuses on the rate at which revenue, users, or market share is increasing — usually by highlighting customer acquisition, product expansion, or geographic scaling. A moat story, by contrast, emphasizes why that growth is sustainable and defendable over time. Growth gets attention, but without a moat, it’s fragile — competitors can mimic your offer and siphon your momentum. Buyers value both, but moats are often weighted more heavily in the final stages of M&A. Growth can be turbocharged post-acquisition with capital and resources, but moats can’t be bought — they must be built, and they often justify premium multiples and better deal terms.
What are some red flags that signal a company’s competitive moat isn’t strong enough?
Several warning signs can indicate a company’s moat is either narrow or non-existent. First, if the business is heavily reliant on one or two clients or a single marketing channel, that suggests weak customer stickiness. Second, if competitors can easily undercut your pricing or replicate your offering, there’s little barrier to entry. Third, if you as the founder are the only reason customers stay — meaning no systems, no team depth, no scalable processes — the moat is essentially personal, not structural. Lastly, a lack of documentation around IP, customer contracts, and operations makes it hard for buyers to trust that the moat is real and transferrable.
How can a business owner communicate their moat effectively during the M&A process?
To maximize valuation and buyer confidence, it’s crucial to clearly and credibly demonstrate your moat throughout the M&A process. This starts with your CIM (Confidential Information Memorandum), where you should highlight your defensible assets — whether they’re proprietary technology, long-term contracts, exclusive licenses, switching costs, or embedded partnerships. Use data to show customer retention rates, renewal cycles, or barriers to competition. During due diligence, provide documentation — tech stack diagrams, patent filings, customer testimonials, SOPs, etc. Lastly, be prepared to tell a narrative that links your moat directly to cash flow stability and upside potential. A well-communicated moat tells the buyer: “You’re not just buying revenue — you’re buying security.”