Barriers To Exit

Updated on February 23, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Barriers To Exit Definition

Barriers To Exit are the restrictions that stop companies from exiting a particular industry or market. Theoretically, it sounds easy to exit a market by shutting down operations and selling off the assets, but many impediments make it challenging for companies to exit the industry.

Barriers To Exit

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Barriers To Exit (wallstreetmojo.com)

Many companies consider these as obstacles while entering an industry, which may restrict them from leaving the market forever. These barriers make it costly for businesses to operate and induce high competition as firms with no option tend to stay and fight the market problems.

Key Takeaways

  • Barriers to exit refer to obstacles that prevent firms from exiting a market or industry and make it costly for them to operate.
  • The opposite of barriers to exit is the impediments, referred to as barriers to entry, that prevent businesses from entering a particular market.
  • Some common barriers to exit are high regulations, employee rights, high fixed exit costs, environmental implications, and skilled niche products.
  • Having proper research done about these barriers makes the process easy and convenient for the company to exit.

Barriers To Exit Explained

Barriers to exit are typical obstacles that come in the way of businesses that no longer want to operate and leave the industry. The reasons for companies to exit may vary depending on internal and external factors. Still, these exit barriers restrict and force them to stay active even if the profits are low and there is no sign of future growth.

Contrary to this, there are barriers to entry that businesses commonly face. Reasonable competition and market leaders may take over new companies or force them to shut down. The study of barriers to exit economics shows that these factors are also compared to the barriers of entry in order to understand the consequences and options if the company leaves the market one day.

When a company predicts no future growth and high earnings prospects, it usually wants to exit the industry. Still, different types of barriers to exit require the smooth closing and winding up of a business. Though a business may eventually exit the market with a focused and relentless pursuit, these barriers make the process easier, more convenient, and more flexible.

Factors

The common factors in barriers to exit economics are as follows:

#1. Specialized Assets

When a company owns specialized and unique assets, it becomes difficult to write them off or find a suitable buyer for them because only some are interested in investing in such assets. It is also because these assets and niche products do not work in any other industry.

#2. High Closing Costs

Even if a company decides to leave the market, there are loans, property costs, vehicle costs, and several other settlements that they have to pay and take full responsibility for before starting the process of market exit.

#3. Environmental Implications

When a company is leaving a particular industry, there is an environmental clean-up that it is responsible for. Suppose the company was throwing away factory waste and garbage or releasing toxic elements into the environment. There is a clean-up cost that the company has to incur when leaving the industry. There is an Environmental Protection Agency and other associations that pertain to it.

#4. Loss Of Market Goodwill

If a company has lost its reputation in the market, there is no other company or entity that would like to associate with it. The company’s only remaining choice, given the minimal market interest, is to close it down.

#5. Penalties

It is a high barrier to exit as government regulations, incentives, and new restrictions on taxation policies force businesses to pay an increased penalty for their operations. At the same time, there are certain benefits that the company will lose if it decides to leave the industry.

#6. Huge Debt Settlement

In this instance, the company’s only remaining choice is to operate at minimum profit. In order to gradually pay off the debt, as they are unable to do so even after selling the business.

#7. Employee And Labor Protests

If everything is under control, there are often employee rights and long-term workers’ contracts that stop businesses from leaving the market. Suppose employees can file a lawsuit or protest for higher pay and end up in litigation issues. In that case, it becomes a significant threat to the company’s ability to keep operations running.

Examples

Below are some examples that will help in understanding the concept better:

Example #1

Steven owns a shoe brand and specializes in manufacturing expensive, high-end products that cater to a specific market and group of high-class people.

Abruptly, the government passed a new tax regulation that concerns high-end brands, increasing the tax rates and setting a cap on the highest selling price. It severely impacted Steven’s business because now he had to pay high taxes on his annual revenue. Also, he could not set a higher price above the price cap set by the government.

Now, if Steven wants to exit the industry, there are general barriers that restrict him from doing so. The shoe industry was becoming more competitive at the same time. Shoe brands that had not been able to compete with Steven’s brand in the past were now offering alternatives. It pressures Steven to stay and fight in the industry.

It is essential to observe that it is difficult even if Steven wants to sell off his company and all the assets his business owns. In a way, Steven is stuck in the industry forever.

Example #2

According to the conference papers of 2011, there were several barriers to the exit of the Irish printing industry. These barriers include both managerial and economic obstacles. Some of the high barriers to exit are the overbuilding of the industry, competitive rivalry, and low market growth rates.

Additionally, companies without sunk capital costs have a higher probability of going out of business. Capacity rationalization is a significant problem for those with high sunk costs. Exit barriers have gained momentum through the market environment, companies’ decision-making processes, and strategies.

Frequently Asked Questions (FAQs)

1. Do monopolies have high barriers to exit?

Since there is only one seller in the monopoly market, the barriers to exiting a monopoly market are high because of the presence of some legal barriers like patents, copyrights, and intellectual property rights.

2. What are the barriers to exit in a monopoly?

The barriers to exit in monopoly are the intangible assets that a company has owned for a long time, for example, patents, copyrights and trademarks, and government licenses. When a company tends to exit the market, it becomes hard for them to settle each asset or find a suitable buyer.

3. What are the low barriers to exit?

The low barriers to exit are the opposite scenario, where a company has no problem leaving the industry and everything from assets to liabilities is sorted and well taken care of. It also means that the company has a solid financial position and goodwill.

This has been a guide to to Barriers To Exit and its definition. Here, we explain the concept along with its examples and factors. You can learn more about financing from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *