Reviewed by Sep 30, 2020| Updated on
An exit strategy can be defined as a contingency plan to liquidate or dispose of a financial asset once the predetermined event/circumstance for the asset has been met by a business owner, trader, or an investor.
An exit strategy is usually implemented to close a non-performing asset. This will ensure that the losses associated with a particular underperforming asset are limited. However, an exit strategy can also be implemented if the financial or business asset has already met the investment objective.
There can be many other reasons due to which an investor or business could execute an exit strategy. It can range from slowdowns in the economy to other simple reasons, such as the investor facing a liability lawsuit or wishing to retire and redeem his investments.
Exit strategies can further be classified into two types:
A business exit strategy is executed when an entrepreneur wishes to offer his/her company’s ownership to the public or another interested company. This exit strategy will not only allow the owner to liquidate his/her stakes in the company but also make a considerable profit if the business in question has been successful at the time of sale.
In this case, investors and traders set the point for the performance of the assets at which they will have to sell the asset. Meaning, the trader/investor will already have set a point at which they will sell the asset for gain and a point at which they will sell for a loss. This exit strategy can limit the risk involved and enhance the trading capabilities of the investor or trader.
While trading exit strategies focus on preventing huge lose from failing investments and making significant profits from well-performing assets, business exit strategies focus on a plan to contain the loss associated with a failing company using a strategic approach.