What is an Exit Option

An exit option is a stipulation within a business plan or project that allows a company to discontinue the plan with limited financial consequences. An exit option can typically be exercised after pre-stated key developments have occurred within a project or business plan. Not to be confused with options trading on underlying securities, an exit option refers to investment options and capital budgeting decisions, such as whether to pursue an investment option, discontinue investment or pursue other business options.

BREAKING DOWN Exit Option

For example, if company XYZ decides to expand their number of operating factories by 10 over five years, an exit option might be stated to allow that after two years, XYZ can discontinue spending on the factory expansion. The exit option would allow them to discontinue the plan and would be included within contractual obligations with, for example, suppliers and land developers. Exit options may also be built into research and development plans or smaller business projects which may not remain viable financially after commencing.