What are 'Barriers to Exit'

Barriers to exit are obstacles or impediments that prevent a company from exiting a market in which it is considering a cessation of operations or from which it wishes to separate. 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 the 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 may 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.

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