Barriers to exit - What are barriers to exit?
Barriers to exit are problems a company or business faces when trying to leave a particular industry or market.
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Barriers to exit are the opposite of barriers to entry and usually occur in specialised or highly niche industries.
Barriers to exit that will exist for a company will depend on which industry they’re in, and why they’re looking to exit the market. The two main types are outlined below.
If the company has invested a lot of money in fixed assets that can’t be sold or transferred (such as manufacturing machinery that is dedicated to a particular task or niche), then they’ll struggle to get around this issue before they can withdraw from the market.
Alternatively, they might face penalties from their suppliers and contractors due to having to end their agreements early. Although they might not be expensive to the company individually, combined they could total quite a hefty bill which might deter the company from breaking agreements during the withdrawal process.
As part of the winding down process, naturally, the company must begin to lay off or make employees redundant.
If the industry is specialised, or generally highly paid, then in turn it means that the redundancy packages offered will also have to be of equally great value. Again, it's a numbers game where individually the cost would not be particularly great but can be prohibitive when everything is tallied up as one lump sum.
It actually makes a lot of sense to assess barriers to exit after you've assessed barriers to entry - assuming you have the chance when first starting out and are looking at the overall picture of the industry you'll be in and what you'll be competing against.
Although it might seem negative to look at leaving the market before you've even begun, it can be good to get an advanced warning of what lays ahead if you ever wanted to move into a new market and shift into an entirely different direction down the line.
By reviewing contracts that have been drawn up for both employees and suppliers/ contractors, you can get an idea of the hidden costs that would arise if you wished to leave the market, as well as any additional costs that would need to be paid for.
As an example, a mining or lumber company would need to assess how much it would need to pay in environmental fees when they close a site they’ve been using to ensure that any environmental damage had been compensated for.