What is an Exit Strategy?

An exit strategy is as the name suggests - a strategy that refers to your plan for exiting. You should never commit to anything without an exit strategy or you will end up trapped and potentially in trouble. Knowing when and how to exit is a vital skill in all areas of our lives which will help us to make the best of a situation and to quit while we're ahead. Clinging on too long is often what turns a great situation into one that turns sour, while a good exit strategy can make even the worst situations profitable.

In finances an exit strategy refers to how you 'cash in' and get out of your investments. The whole point of an investment is really that you get profit for them and increase your capital, and if you're investing in stocks and shares then you never know which way your investments are going to go until you actually cash in on them. Even with properties the money won't be free for making new investments and growing in other ways until you take the money back out. In this sense the exit strategy could be seen as one of the most important elements of playing the stock market. Before this point you may be successful in terms of assets, but this will really just be on paper until you use your exit strategy.

An exit strategy then is the way in which a venture capitalist gets out of their past investments and this can involve a range of techniques. For example it might mean accepting an 'initial public offering' (or IPO). This is taking a corporation's first offer to sell to the stock market, the first time it opens to the public. This is the most common exit strategy for early investors such as business angels. Alternatively it might involve being bought out by a larger company or individual in the industry.

For private individuals an exit strategy can be more difficult as they will be likely to be working with private companies that are not open to the public. When a firm is private it is owned by just one individual and so it cannot easily sell off individual shares. A private firm could be worth millions of dollars but the entrepreneur may have little access to the wealth. As such in this case the exit strategy involves for them trading an illiquid asset for a liquid one. Exit strategies may also be made more difficult if the industry is unpopular, or where the economy is struggling and financial investments are fewer to begin with.

Going into any investment it is important to look into your potential exit strategies, and depending on the nature of the investment these may have to be a specific kind or might be more difficult. However by knowing how the investment will end you can prevent yourself from having a valuable asset and no way to part with it and as such will be able to make the very most out of your investments.

Decide on your exit strategy and learn more about them by reading 'exit strategies for financial success'. Find out more about investments and personal finance at the personal finance and stock market investment blog