An exit strategy is a contingency plan implemented by an investor, venture capitalist, or company owner to liquidate a financial asset position or dispose of physical business assets if preset conditions are fulfilled or surpassed.

An exit plan may be used to get out of a losing investment or to end a losing company. In this scenario, the exit strategy's goal is to reduce losses.

What Exactly Is an Exit Strategy?

When an investment or commercial initiative has achieved its profit goal, an exit plan may be implemented. An angel investor in a new firm, for example, may prepare an exit strategy via an initial public offering (IPO).

Other reasons for implementing an exit strategy include a dramatic shift in market circumstances as a result of a catastrophic occurrence; legal reasons such as estate planning, liability litigation, or a divorce; or simply because the firm owner/investor is retiring and wants to cash out.

Exit Strategies: An Overview

Regardless of the investment type or company endeavor, a good exit strategy should be established for every positive and bad circumstance. This planning should be an essential part of calculating the risk of the investment or business endeavor.

A business owner's exit strategy is a strategic plan for selling ownership in a firm to investors or another company. It provides a procedure for reducing or liquidating ownership in a firm and making a big profit if the business is successful.

If the firm fails, an exit strategy (or exit plan) allows the owner to reduce losses. An investor, such as a venture capitalist, may also utilize an exit strategy to plan for the cash-out of an investment.

Exit strategies and other money management tactics may help investors eliminate emotion and decrease risk. Before making an investment, investors should decide when they will sell for a loss and when they will sell for a profit.

Who Needs an Exit Strategy?

Business owners, whether small and big, must develop and maintain strategies to manage what happens to their company should they decide to quit. An entrepreneur of a startup may depart by an IPO, a strategic purchase, or a management buyout, but the CEO of a bigger firm may exit through mergers and acquisitions.

Investors such as venture capitalists and angel investors need an exit strategy in order to decrease or remove their exposure to failing investments and capitalize on other possibilities. A well-planned exit strategy also indicates when to register profits on unrealized gains.

Why Is an Exit Strategy Necessary?

Businesses and investors should have a well-defined exit strategy in place to reduce possible losses and maximize revenues from their investments. Here are a few particular reasons why having an exit strategy is essential.12

An exit strategy eliminates emotions from the decision-making process. Having a specified level at which to leave an investment or sell a company helps prevent panic selling or making rash choices while emotions are high, which might amplify a loss or fail to realize a profit entirely.

Setting objectives: Having an exit strategy with clear goals may assist answer crucial issues and influence future strategic decisions. For example, a startup's exit strategy may incorporate a potential buyout price dependent on revenue turnover. This statistic would aid in strategic choices on how large to develop the firm in order to meet set sales objectives.

Unexpected occurrences: Unexpected occurrences are a part of life. As a result, having an exit strategy for what happens if things don't go as planned is critical. For example, what happens to a firm if the proprietor becomes sick unexpectedly? What happens if a major supplier or client leaves the company? These scenarios need forward preparation in order to prevent possible losses and maximize on rewards.

Startup Exit Strategies

Successful entrepreneurs arrange for a complete exit strategy in the event of a fledgling firm to prepare for business operations failing to fulfill preset milestones.

If cash flow dries up to the point that company operations are no longer sustainable and an external capital injection is no longer conceivable, then a scheduled cessation of operations and liquidation of all assets may be the best alternative to avoid additional losses.

Before committing any funds, most venture funders need a thoroughly defined exit strategy to be included in a company plan. Business owners or investors may also opt to quit if another party makes a profitable offer for the company.