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.
How Exit Options Work
For example, if company XYZ decides to expand its 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.
Although exiting a business makes sense for those approaching retirement or those who crave a lifestyle change, for many business owners, it's better to white-knuckle it through rough patches, rather than exiting their companies altogether.
Exit options may also be built into research and development plans or smaller business projects that may not remain viable financially after commencing.
Shuttering a Business
Exit options also refer to the action of closing down businesses. According to consultant Pino Bacinello, there are various exit options available to business owners who are looking to leave their operations behind, including the following solutions:
- An outright sale of the business
- A partial sale of the business
- A sale of only the business’s assets, including manufacturing equipment and other machinery
- A sale, based on unloading the shares of stock in the company, which may include a fully-operational balance sheet, a partially operational balance sheet, or a stripped-down balance sheet
“If this sounds complicated, that’s because it really is,” Bacinello notes. “There are many moving parts and options, and each situation is unique and different, requiring specific individual considerations."
Retiring a Product
It is sometimes a wise decision for a business to retire a product or a service from the marketplace, for any number of reasons, including the following examples:
- A business is pivoting from catering to B2B clients to B2C clients, or vice-versa.
- The current technological climate no longer supports the need for a given product or service. For example, VCRs gave way to DVD players, while dial-up internet service was rendered obsolete by broadband and cable connection.
- The price of underlying materials proves too cost prohibitive in manufacturing the end product.
- Consumers migrate to a competitor’s product, which is claiming runaway increased market share.
- The term "exit option" refers to a method of a company discontinuing a business plan or a product line, with minimal financial consequences.
- Exit options are generally executed after declared key developments have been satisfied, but where the effort must still come to a halt, for one reason or another.
- In an entirely different context, the term "exit option" is used to describe methods of pivoting away from certain investments.
In all of these aforementioned situations, it makes logical business sense to leave behind the research and development of product silos that will likely contribute to a company's dwindling profits. This corrective move opens the door for different product-lines that offer higher possibilities for success.