What is an 'Exit Strategy'

An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist or business owner to liquidate a position in a financial asset or dispose of tangible business assets once certain predetermined criteria for either has been met or exceeded. An exit strategy may be executed for the purpose of exiting a non-performing investment or closing a business that is not generating profits. In this case, the purpose of the exit strategy is to limit losses. An exit strategy may also be executed when an investment or business venture has met its profit objective. Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning, liability lawsuits or a divorce; or for the simple reason that a business owner/investor is retiring and wants to cash out.

BREAKING DOWN 'Exit Strategy'

An effective exit strategy should be planned for every positive and negative contingency regardless of the type of investment, trade or business venture that is entered into. This planning should be an integral part of determining the risk associated with the investment, trade or business venture.

Exit Strategy for a Business Venture

In the case of a startup business, good business people always plan for a comprehensive exit strategy in case business operations don’t meet predetermined milestones. If cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit any further losses. Most venture capitalists usually insist that a carefully planned exit strategy is included in a business plan before committing any capital. Business people may also choose to exit if a very lucrative offer is tendered by another party for the business.

Exit Strategy for a Trade

When trading securities, whether it’s for long-term investments or intraday trades, it is imperative that exit strategies for both the profit and loss sides of a trade be planned and diligently executed. All exit trades should be placed immediately after a position is taken. For a trade that meets its profit target, it could immediately be liquidated or a trailing stop could be employed in an attempt to extract more profit. Under no circumstance should a winning trade be allowed to become a losing trade. For losing trades, an acceptable loss amount should be predetermined and a protective stop loss should be placed and strictly adhered to.

In the context of trading, exit strategies are extremely important in that they assist traders with overcoming emotion when trading. When a trade reaches its price target, many traders experience greed and hesitate to exit for the sake of gaining more profit. Ultimately, this leads to winning trades turning into losers. When losing trades reach their stop loss, fear creeps in and traders hesitate to exit losing trades, causing even greater losses.

RELATED TERMS
  1. Business Exit Strategy

    A business exit strategy is an entrepreneur's strategic plan ...
  2. Profit Target

    A profit target is a predetermined point at which an investor ...
  3. Trading Strategy

    A set of objective rules designating the conditions that must ...
  4. Barriers To Exit

    Barriers to exit are obstacles or impediments that prevent a ...
  5. Venture Capital Funds

    Venture capital funds invest in early-stage companies and help ...
  6. Protective Stop

    A strategy designed to protect existing gains or thwart further ...
Related Articles
  1. Small Business

    Exit Strategy: Know How You Will Leave Your Business

    All business owners need to have an exit strategy in place, preferably sooner rather than later.
  2. Small Business

    Exit Strategies for Business Owners

    Ideally, an exit strategy is planned early in the life of the business, begin with the end in mind.
  3. Trading

    FX Exit Strategies: Keeping Your Profits

    There are several useful methods for exiting a position, all which are easy to execute and can be implemented into a trading plan.
  4. Trading

    Simple & Effective Exit Trading Strategies

    An effective exit strategy builds confidence, trade management skills and profitability.
  5. Small Business

    Why Business Owners Need a Succession or Exit Plan

    Most Baby Boomer business owners lack a formal succession plan or exit strategy.
  6. Trading

    Day Trading: Top Scenarios To Take Profits

    Three ways to take profits while day trading, based on price movement and what the asset is doing that day.
  7. Financial Advisor

    Being a venture capitalist: A how-to guide

    So you want to be a venture capitalist? Learn what it takes, what you need to know, where to start, and what kind of life you will need, to take on the world of venture capitalism.
  8. Trading

    Day Trading for Beginners

    Interested in day trading but don't know where to start? Here are some common day trading strategies, as well as some day trading tips for beginners.
  9. Trading

    Bad Luck With Trades? 5 Things You Might Be Doing Wrong

    If you're in a trading rut, ask yourself these five questions to help turn the corner.
  10. Small Business

    Exit strategies: A key look

    Find out strategies for setting appropriate exit points when trading to help you avoid taking premature profits or running investment losses.
RELATED FAQS
  1. Do joint ventures need an exit strategy?

    Understand why an exit strategy is important for a business partnership such as a joint venture, and learn the options partners ... Read Answer >>
  2. What are the primary advantages of forming a joint venture?

    Understand what the advantages of a joint venture are and discover what make this business strategy a good alternative to ... Read Answer >>
  3. What are the primary disadvantages of forming a joint venture?

    Learn the disadvantages to forming and maintaining a joint venture partnership, including factors business owners should ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center