An exit strategy is a predetermined plan to sell an investment or relinquish a strategic position at a certain time in order to maximize a return. Exit strategies are important pillars of successful investing since most investments are made with the intention of eventually selling them for a profit.

While strategies will differ depending on investors’ financial goals, the aim of most exits is to sell a position at a higher value than the original investment, enabling investors to ‘cash out’ their capital and any profits made over the duration of their investment.

However, many things can impact the timing of an exit, such as market conditions and company performance, which can have either positive or negative effects on value at the time of a sale. Without an exit strategy, investors risk losing out on any returns made by holding their position too long, should the value of their original investment fall.

Within private equity circles, common exit strategies include:

• An initial public offering or IPO, whereby the company lists its shares on a public stock exchange, allows private investors to dispose of their stakes – either gradually over time or all at once.
• A trade or ‘strategic’ sale, through which the company is acquired by another entity.
• A secondary sale, whereby a private equity firm sells its holding in a company to another private equity firm or institutional investors.
• A management buyout or MBO, which – as the name suggests – sees private owners sell the company back to management. These usually take place when company leaders want to take back control of a business that no longer needs financial backing from private equity.
• Liquidation, when private equity investors determine that the business is no longer financially viable or has reduced return potential, choosing instead to wind it down and sell off its assets. This is usually a last resort, and investors may not recover their original investment.