What are 'Barriers To Exit'

Barriers to exit are obstacles or impediments that prevent a company from exiting a market it is considering a cessation of operations in or wishes to separate from. Typical barriers to exit include highly specialized assets, which may be difficult to sell or relocate, huge exit costs, such as asset write-offs and closure costs, and inter-related businesses, making it infeasible to sell a part of it. Another common barrier to exit is loss of customer goodwill.

BREAKING DOWN 'Barriers To Exit'

A company may decide to exit a market because it is unable to capture market share or turn a profit or for some other reason altogether. The dynamics of a particular industry or market may change to such an extent that a company may see divestiture or spinoff of the affected operations and divisions as an option. However, circumstances, regulations, and other impediments may prevent such moves. For example, a retailer may wish to eliminate underperforming stores in certain geographic markets, particularly if the competition has established a dominant presence that makes further growth unlikely. A retailer might also wish to leave one location for another that offers potentially higher foot traffic or access to a demographic with customers with higher salaries. Before making such moves, the retailer might be locked into a lease with terms that make it prohibitive to shut down or leave their current locations.

A company could have received certain benefits, such as tax breaks and grants from the local government that encouraged it to set up shop in a location. Those incentives may have come with high penalties if the company attempts to move its operations before fulfilling the obligations and terms set forth in the deal.

High barriers to exit might force it to continue competing in the market, which would intensify competition. Specialized manufacturing is an example of an industry with high barriers to exit, because it requires large up-front investment in equipment that can only do one task. If a specialized manufacturer wants to switch to a new form of business, they may be constrained by the money already invested in the cost of their equipment. Until those costs have been covered, the company many not have the resources to take on a new line of business. Companies in heavy industry can face extensive cleanup costs if they consider closing a factory or other production facility that used or produced materials that left traces at the site. The expense of removing that material may outweigh the benefit of relocating the operation.

  1. Barriers To Entry

    The existence of high start-up costs or other obstacles that ...
  2. Double One-Touch Option

    A type of exotic option that gives an investor an agreed upon ...
  3. Up-and-In Option

    An option that can only be exercised when the price of the underlying ...
  4. Open Market

    An open market is an economic system with no barriers to free ...
  5. Exit Point

    The price at which an investor sells an investment. The exit ...
  6. Exit Visa

    An exit visa is a government-issued document required by some ...
Related Articles
  1. Investing

    Capital Intensive Companies: What Are The Pros & Cons for Investors?

    Learn about the pros and cons of investing in capital-intensive industries. Find out how barriers to entry and mature industries impact investment outlook.
  2. Small Business

    3 secrets of successful companies

    Make smart investments by using these three secrets to spot up-and-coming companies to invest in before they become household names.
  3. Small Business

    Exit strategies: A key look

    Find out strategies for setting appropriate exit points when trading to help you avoid taking premature profits or running investment losses.
  4. Insights

    Odds of European Brexit Rise After Terror Attacks

    Tuesday's terror attacks in Brussels have seen the odds of a British exit from the European Union rise.
  5. Small Business

    Why Business Owners Need a Succession or Exit Plan

    Most Baby Boomer business owners lack a formal succession plan or exit strategy.
  6. Trading

    Effective Risk Control With Scaling Trading Strategies

    Scaling strategies allow for greater risk control than simple entries or exits, letting traders seek the most advantageous prices available.
  7. Trading

    The Morning Forex Fake-Out Trade

    By watching for false breakouts, reversals and using multiple exits, a forex trader can capture a large portion of the daily average movement.
  8. Investing

    Using Porter's 5 Forces to Analyze Stocks

    Porter's five forces are a set of qualitative measures that allow investors to draw conclusions.
  1. How strong are the barriers to entry in the oil and gas sector?

    Learn what a barrier to entry is and how it helps existing companies. Understand the strength of barriers to entry in the ... Read Answer >>
  2. What parameters are required for a market to exhibit perfect competition?

    Learn what parameters are required for a market to exhibit perfect competition and how perfect competition is more of a theory ... Read Answer >>
  3. What are the key barriers to entry for companies in the electronics sector?

    Learn how the entry barriers of economies of scale and scope, research and development, capital and brand loyalty affect ... Read Answer >>
  4. What do high economic profits in a given industry suggest about that industry?

    Learn how certain industries have high economic profits and what it says about those industries; the key is the industry ... Read Answer >>
  5. What barriers to entry exist in the utilities sector?

    Learn about the significant barriers to entry in the utilities sector, including large infrastructure requirements and governmental ... Read Answer >>
  6. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center