Definitive Guide to Exit Barriers (With Examples)
When a business wishes to exit a market, it may encounter something called an exit barrier. These are common occurrences that typically only delay an exit, and they often have simple solutions. Understanding what exit barriers are for businesses can help businesses determine if any common barriers are preventing their exit from a particular market. In this article, we define this term, list common exit barriers and provide some examples to give you additional context.
What is a barrier to exit?
Barriers to exit are any factors that prevent a business from exiting a market. Businesses often leave specific markets or industries for a variety of reasons, including lack of innovation, lack of employees, environmental reasons or financial reasons. Leaving an industry can be a complex process, and businesses can experience barriers that require unique solutions to overcome.
Common exit barriers
There are many common exit barriers to consider, including:
Sometimes, a company leaving a specific industry has environmental implications that the company may need help to rectify. For example, a chemical company that produces herbicides might incur significant cleanup costs if the company's leaders decide to exit the market. If the company dumped waste in waterways or other natural areas, the business likely has to cover any cleanup costs and fees associated with those cleanups from the Environmental Protection Agency, or EPA. If damages occur, the EPA may issue significant fines that can also act as an exit barrier for the company through financial pressure.
Tax or government incentives
Some businesses receive tax breaks or other government incentives to relocate to certain areas. Towns or cities might offer incentives for businesses to attract more jobs and increase the production of an area, which can be excellent reasons to start a business there, but might also double as an exit barrier. If the company leaves that particular market, it loses access to those incentives. Sometimes, tax incentives are significant enough to make a major impact on company profits or salaries and might help keep a company in business.
Specialized equipment, tools or software
When a company has specialized equipment, tools or software for their exact market niche, that equipment can be a barrier. For example, manufacturing companies typically purchase or build specialized machinery to perform only certain tasks. This machinery is only for those tasks and doesn't have the option of repurposing, typically requiring a larger initial investment. This can act as a barrier as the company may try to sell the equipment, scrap it for parts or rent it to another business in the same niche to recover some of the cost.
Labor contracts or employee rights
Companies may experience exit barriers when employees exercise certain rights or have long-term labor contracts. These contracts can often guarantee a certain amount of work and pay for extended periods of time. The company typically has no choice but to honor such contracts, as a contract breach could result in litigation or other legal issues. Employee rights might also prevent a company from quickly exiting a market, as employees might have a right to severance packages or notice of the company's intent to exit.
Long-term contracts or project commitments
If a company agrees to a long-term contract or project, it might be unable to exit the market until it completes that project. Project contracts ensure that clients get the services or products they're paying for, and detail the completion of that project. Violating a contract or project agreement typically isn't an option, especially if the company's executives want to maintain a relationship with any clients even after exiting the industry.
Niche skills or products
Companies sometimes create niche skills for designing or producing their products and services. These skills don't apply in other industries and may prevent company leaders from exiting a market due to a lack of choices. Company leaders may also have excess product stock if they were unable to gain a market share, forcing them to remain in the market until they can find a buyer for the excess stock. Leaders may resort to liquidation sales and discounts to move inventory and overcome the exit barrier of excessive stock.
High fixed exit costs
Another exit barrier for businesses is high fixed costs. This can include loans, which the company pays back over time, property costs, vehicle costs or any settlement packages for investors and employees. High fixed costs may prevent a business from exiting their industry until the company can secure the funds to pay the balances or settle with any investors or employees. This is one of the most common reasons that businesses remain in an industry, regardless of whether the company turns a profit.
Exit barriers as a positive opportunity
Exit barriers aren't always a negative experience for a company. Some companies remain in an industry due to one or more exit barriers and restructure the company to be more adaptive to the market. This kind of response can help business leaders learn more specific industry skills, become more adaptable and take advantage of the resources already available to them. For example, if a manufacturing company encounters exit barriers, they might restructure the company to produce a more niche item, expanding their market share and attracting new customers.
Examples of exit barriers
Here are some examples of exit barrier situations for context:
Tyran Steel LLC formed in 2016 and began producing steel rods for construction. The company initially had high startup costs, with expensive steel-bending machinery and refinery equipment. Business leaders struggled to turn a profit, so they decided to consider exit strategies but encountered multiple barriers, including high fixed costs, specialized equipment and labor contracts for workers. Instead of exiting, the company restructured its debt and created a new plan to begin producing steel drums for a neighboring chemical company instead of rods.
Drake Pesticides Inc. is a chemical pesticide company founded in 2002. It produces strong chemical pesticides and some herbicides for farmers in their area. These farmers gradually turned to organic farming, and demand for Drake's products plummeted. The company considered an exit strategy but encountered a strong exit barrier because of their pollution of the local waterways. Its estimated $30 million in cleanup efforts and fines from the EPA inspired a renewed filtration effort to prevent further pollution. The company changed to producing organic fertilizers instead of pesticides to reclaim its market share in agriculture.
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