What is an Exit Strategy?

An exit strategy is basically a plan to get out of a situation. The term exit strategy is most often applied to investment in business, and to military engagements. An exit strategy is recognized as being crucial to help bring about a positive conclusion to either a business or military undertaking.

In business, an exit strategy is usually determined at the outset of the business modeling. A good business plan will incorporate an exit strategy for investors, helping to show them that the model will result in profit for them, no matter what. An exit strategy can take a number of different forms, depending on the business, the investment, and the general climate. An exit strategy is often presented as a bail-out option, in case the company begins losing money, or it appears its future is not as bright as predicted.

Perhaps the most ideal exit strategy for a business from an investor standpoint is simply to sell the entire project. A buyout can have a great return on investment, can happen within a relatively short period of time, and involves very little fuss or confusion. If the company was successful, and the marketplace is ripe for their product or service, selling an equity position can offer a great yield.

If a company doesn’t want to entirely sell off, they might recapitalize as an exit strategy instead. This will allow them to pay off their current set of investors, allowing them to exit from their investment, but will allow the company to remain under its current ownership, and continue functioning.

The current climate of Internet startups, like the dot-com boom of the 1990s, has been criticized for its heavy reliance on a single-minded exit strategy. It has been quipped that 90% of Web 2.0 companies have as their entire business model the simple idea of getting bought out by Google or Yahoo!. Of course, while this is an excellent exit option if it is offered, it makes a poor exit strategy, because the odds of it actually occurring are quite low.

In military use, an exit strategy refers to a plan for getting out of a conflict at a certain point. In modern warfare it is considered risky to enter a war without a very clear exit strategy, including quantifiable measures of success and limits of acceptable losses, in tandem with plans for dropping out of the conflict without leaving a large power vacuum. The phrase was widely used during Vietnam, although not in the public forum.

The idea of a military exit strategy reached widespread public usage during the Clinton administration, when President Clinton was repeatedly criticized for failing to have an exit strategy for a number of conflicts the United States became involved in. It continued to be used during President Bush’s administration, in relation to the wars in Afghanistan and Iraq.

In both business and war, an exit strategy allows those involved in supporting the endeavor — investors or the general public, respectively — to have more confidence that they won’t lose everything should things go poorly.