Exit strategies are a contingency strategy which is implemented by an trader, an investor, venture capitalist or business owner for the purpose of liquidate the position in the financial market or to dispose of tangible assets of a business when the criteria set for either have been achieved or exceeded.
An exit strategy can be implemented to close the investment that is not performing well or end a business that is not profitable. In this scenario the goal of an approach to exit would be to reduce losses.
An exit strategy can also be carried out in the event that an business or investment is able to meet its profit target. For example one who is an an angel investors in a new business might plan to exit the strategy by way of the process of an Initial public offering ( IPO).
Other motives for using an exit strategy can include the impact of a major shift in market conditions as a result of the occurrence of a catastrophe or legal reason for example, the planning of an estate, liability lawsuits or divorces or the basic reason that an investor or business owner is retiring and would like to take a cash payout.
Strategies for business exit are not to be used in conjunction with trading strategies for exit employed in the securities market.
Understanding Exit Strategies
A successful exit strategy must be prepared for each negative and positive event, regardless of the nature of trade, investment, or venture. Planning must be an integral component of determining the risks associated with the trade, investment as well as business.
The business exit method is a business owner’s plan of action to sell their stake in the company to investors or to another company. A exit strategy provides an owner of a business a method to lower or eliminate the stake they have in the business and, if the venture succeeds, earn significant profits.
If the business isn’t effective An plan for exit (or “exit plan”) can help the business owner limit losses. Exit strategies can also be employed by investors like an investor in venture capital to plan for a cash-out from an investment.
For both investors and traders exit strategies as well as other techniques for managing money can significantly improve the trading process by removing emotions and reduce risk. Before committing to a trade investors are advised to establish a date that they will make a loss on their sale and also a time when they can sell at gains.
The management of money is among the most vital (and most under-appreciated) aspect of trading. For instance, many traders start a trade without any exit strategy in place and tend to make a profit that is too high or, in the worst case, suffer losing money. It is important for traders to know the options for exits open to them and devise an exit plan that will reduce losses and secure profits.
Exit Strategies for Business Ventures
If you are in the process of starting an entrepreneur’s first venture successful entrepreneurs have an entire exit strategy should operations don’t meet certain deadlines.
If cash flow is dwindling to the point that the business’s operations are no longer viable and an external capital injection is not viable to sustain operations, a planned cessation of business operations and liquidation process for all of the assets can be the best option to minimize the possibility of further losses.
Many venture capitalists suggest that a well-planned exit strategy is part of a business plan prior to the commitment of any money. Investors or business owners might also opt to quit when a lucrative offer to purchase the company is made by an alternative person.
In the ideal scenario, entrepreneurs will create an exit strategy in the initial business plan prior to beginning the business. The selection of an exit plan will affect the decisions made in business development. The most common alternatives to exit are initial public offerings (IPO) as well as strategic acquisitions and Management Buy-Outs (MBO).
The strategy of exit that an entrepreneur decides to take is contingent on a variety of factors, including how much control or participation the entrepreneur would like to maintain within the business, and whether they wish for the business to operate exactly the same way or want to see evolve in the coming years. The business owner will need to be compensated the right amount for their ownership stake.
Strategic acquisitions such as this, for instance, will let the founder off the responsibility of ownership, but is also a sign of the loss of control. In general, IPOs are considered to be the most effective exit strategy as these are associated with prestige and huge payouts. In contrast, bankruptcy is viewed as the least appealing way to close a company.
An essential aspect of a exit strategy is a business valuation and there are professionals who can help entrepreneurs (and buyers) analyze the company’s financials to determine its fair value. Transition managers are also available who are responsible for assisting sellers in their exit strategies.
Exit Strategies to a Trade
When trading securities, be it for longer-term investments or intraday trades it is crucial to have exit plans for the loss and profit side of the trade be developed and implemented with care. Every exit trade should be made immediately after the trade is completed. If a trade meets its profit targets the trade could be immediately liquidated, or the trailing stop can be used to gain more profits.
It is not permitted for any winning trade be made to be an unsuccessful trade. In the event of losing trades the investor must determine an acceptable loss and stick to a stop-loss.
When it comes to trading exit strategies are very crucial because they aid traders to overcome their emotions when trading. Once a trade has reached its price target some traders are greedy and may be reluctant to quit in the hope of making more profits, which eventually transforms winning trades into losing trades. If losing trades hit their stop-losspoint, anxiety takes over and traders are hesitant to leave losing trades and cause further losses.
The two options to end the trade: either by losing money or making gains. Traders employ the terms take-profit and stop-loss orders to describe the kind of exit taken. Sometimes, these terms are abbreviated in the form of “T/P” and “S/L” by traders.
Stop-losses or stops are orders made by a broker that allow them to automatically sell stocks at a particular value or point. Once the price is attained the stop-loss order will change into an order from the market to sell. This can reduce losses in the event that the market moves rapidly against the investor.
Take-profits are like stop-losses, in that they’re converted into market orders for selling after the limit point has been exceeded towards the upwards. Take-profit points follow the same guidelines as stop-loss point in regards to execution in NYSE, Nasdaq, and AMEX exchanges.