Cost of an Exit

When a contract or personal relationship is ended, there are often costs involved that the parties fail to consider. If a distribution agreement is terminated, a company could be left with redundant stock, useless marketing materials, and other costs that provide no ongoing benefit. In a relationship, there is the division of assets & liabilities and the cost of the breakup itself.

It is strange that so little thought is given to the cost of an exit, as these should be considered as part of the decision to terminate the contract. Take Brexit, for example. With all the arguments put forward for and against, there was nothing said about the cost of an exit. Moreover, we were told about the enormous cost savings that would result from Brexit, but politicians were silent on the costs that might be incurred. Recently, figures have emerged indicating that the cost of exiting the EU might amount to some £50 billion. This could include unpaid budget commitments, pensions liabilities, and spending on current projects. The actual amount will be subject to negotiation and to the position taking on financial commitments made by the UK, but not yet incurred by the EU. The actual amount payable will be affected by the rate of exchange between the £ and Euro at the time the payments become due. The weaker the pound compared to the euro, the higher the cost will be.

The lack of financial clarity on exiting a contract can be avoided by focusing on the costs at the outset. The amounts may be difficult to quantify, but it is possible to establish the likely costs and this will be of assistance to all the parties. It will also avoid nasty surprises during the negotiation process.

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