What is an Early Exit?
An early exit simply means for owners of a startup entity to leave the business by selling their ownership. It is early, because the exit takes place before the owners intended. It is generally a strategic decision based upon the startups situation.
An early exit strategy may refers to a contingency plan that is applied by angel investor, venture capitalist, business owner, or trader to liquidate financial assets to safely exit from the market.
The main purpose of an early exit is to take advantage of earlier-than-expected gains or to minimize possible losses. An early exit strategy can also be used when the firm is not generating the desired profit or a firm has reached the target and now wishes to sell to an acquirer.
There are many other reasons which can push a firm to execute an early exit strategy. For instance, market conditions are fluctuated, or catastrophic events occurred, or legal cases etc., may lead to liquidation.
What to Expect from an Early Exits
Some of the things to expect or plan for in an early exit are as follows:
Time frame – The early exit can be fast and quick, or it may take few years to complete the whole process.
Risk Mitigation – An early exit can be utilized to minimize risk as risk is inherited in business and anything can happen in the market such as market trend can change, natural disaster may occur, new competitors may enter into market, or new regulations may be imposed which can badly hurt the firms profitability.
Contingency Plan – A business or business owners that fail to develop a contingency plan or early exit strategy subjects themselves to unnecessary risk. So the best strategy is to develop and have an early exit plan and decided upon a target. Once the target is achieved, an early exit strategy should be executed. In case firms wait more in the hope to achieve more gains may suffer losses.
Diversification – Angel investors generally adopt and execute early exit plans. They have many investment choices. They will want to undergo an early exit if they may earn more profits in another venture. For instance, an angel investor can reinvest profit in many financial assets and in this way they mitigate risk by diversifying investment.
Always Have an Early Exit Strategy for Traded Securities
An early exit strategy is pivotal for investments in financial securities. It can be applied to both short term and long term investment and for both profit and loss targets. For instance, an investor may set a price per share at which to sell her holdings. Once the share price reaches that target, it is the time to execute early exit strategy. This mitigates the risk of the shares dropping by forgoing the opportunity to benefit if the shares go higher.