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  1. Barriers to entry
  2. Fixed assets

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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In essence, barriers to exit are the opposite of barriers to entry, and usually occur in specialised or highly niche industries.

What types of barriers to exit exist?

Barriers to exit that will exist for a company will depend upon what industry they are in, and why exactly they are looking to exit the market they are currently in. The two main types are outlined below;

Financial

If the company has invested a lot of money in fixed assets that cannot be sold or transferred (such as manufacturing machinery that is dedicated to a particular task or niche), then they will 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.

Managerial

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 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.

How is it possible to determine barriers to exit?

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 before you've even begun, it can be good to get an advanced warning of what is up ahead if you ever wanted to move into a new market and shift in 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 bear in mind how much it would need to pay in the way of environmental fees when they close a site they have been using to ensure that any environmental damage done had been compensated for.