Final answer:
Exit involves winding up, liquidation, and termination of a business when facing sustained losses. Winding up settles affairs, liquidation sells assets, and termination ends the company's legal existence.
Step-by-step explanation:
When a firm faces sustained losses, the long-term strategy often involves a cessation of operations, known as an exit. This process may involve several stages, including winding up, liquidation, and ultimately termination of the business. Winding up is the process of settling the affairs of the company, wherein assets are sold off to pay creditors and shareholders.
Liquidation is the actual selling of assets and distributing the proceeds to claimants, which leads to the final termination of the corporate entity. Termination, or corporate shutdown, is the point at which the firm legally ceases to exist after all debts have been paid and assets are distributed.
For many firms, winding up and liquidation occur because short term revenues fail to cover variable costs, and in the long run, continuous losses make ongoing operations untenable. This process of reducing production or closing down is known as exit, a strategy taken to avoid sustaining further financial damage and to ensure that remaining assets are distributed to shareholders and creditors in an orderly manner.