What is an Abandonment Option?

An Abandonment Option can be worked into a contract for a capital project at a business, for example, or between an investment advisor and his or her clients.

An abandonment option outlines the terms by which either party in an agreement can choose to cease their involvement in the project or a working relationship without penalty. This may be worked into the contract on a business partnership agreement, a capital project, or even something as simple as the relationship between a financial planner and his or her clients.

It is important to include such a clause in long-term business deals, since it is hard to predict how the future will turn out, and unwinding an old contract can be rife with opportunities to sue or be sued.

A company’s capital project may include a resolution from the board that an abandonment option exists with specific terms, and the assets of the project in question might be continuously appraised of their abandonment value, which is nearly synonymous with liquidation value.

Such an option might be a part of mergers and acquisitions negotiations.