Definition - What does Exit Fee mean?
An exit fee, also known as a termination fee, is a fee charged to investors for withdrawing their investment prior to the stipulated period. These fees are applicable only on certain types of investments such as mutual funds, hedge funds, property investments and annuities, where the fee is expressed as a percentage of total assets. In general, no other flat fee is charged as an exit or management fee.
Divestopedia explains Exit Fee
Exit fees are levied is to protect the third party from any loss that can occur due to the premature withdrawal of investment. It also occurs in cases when a contract is involved or when the investor holds a right against another party and they suffer due to the investor's action of ending the contract prematurely. An exit fee can also be charged by withholding a certain amount of the money returned to the investor.
Exit fees are something that an investor should be aware of at the time of entering into a contract as there will be no explicit explanation from the private equity or investment bank. In fact, details of the exit fees will be printed in small letters in an obscure corner of the document. Therefore, it is up to the investor to ask for the details of the exit fee before investing. While there is no mandated upper cap on how much can be charged for an exit fee, it is generally in the range of one to two percent. Hence, the investor should also include this amount as the cost of investment while evaluating the potential return from a particular investment. Sometimes, taking into account the exit fee can help investors to make informed decisions, where they may opt for a different investment.
John entered into an agreement with ABC Holding to buy an investment property for $500,000. The contract contained the terms that stipulated a two percent exit fee in case of a premature closure. John could not continue making payments after a few months and the contract had to be terminated. ABC Holding retained $10,000 as an exit fee and returned only the remaining to John.