Founders often believe they should wait to “worry about the money until we have the money.” But when it comes to planning for a business exit, that mindset can become one of the most expensive mistakes an entrepreneur makes. The reality is simple: it is never too early to start planning for the exit.
Many founders start planning for the exit two to three years or more before the exit, or once a transaction feels more realistic. The assumption is that every aspect of the sale, especially the financial and planning side, can and should be addressed once a transaction is looming and the finish line is finally in sight. In reality, the most valuable planning opportunities often exist long before a sale process begins. The difference can be profound. For example, one client spent 16 years planning for his eventual exit and was ultimately able to transfer multiple nine-figure sums out of his estate, creating lasting benefits for his family and future generations.
The further you are from the exit, the longer you have to optimize. That optimization can happen from a tax perspective, a dynamic perspective, and a cash flow perspective. This can even enable you to prepare the family for the assets, ensuring your life’s work are assets to the family. Lastly, it also gives founders the opportunity to address operational inefficiencies and strengthen the business before an exit, in addition to creating greater flexibility around future planning decisions.
Why a Lower Valuation Creates Greater Opportunity
One of the most counterintuitive truths in exit planning is that the best possible outcome for your family in regard to an exit is to get a low valuation to start. Most entrepreneurs spend years trying to maximize the value of their business. But from a planning standpoint, your business is expected to be worth materially less the further you are from an exit than it ultimately is upon exit. That lower valuation creates tremendous opportunity.
You want to plan around the lowest value, rather than the highest value, because lower valuations allow founders to transfer future appreciation far more efficiently from a tax perspective. As the company grows and approaches a transaction, that same dollar becomes significantly more expensive to transfer. The impact of timing can be substantial. If you have excess wealth and could leave future generations dollars that cost you dimes, would you?
Consider the founder whose company received a valuation of $8 million and later exited at $60 million through proper planning and applying “discounts” that may be available. Or a founder who was able to transfer a percentage of his or her business at a $2.5 million valuation only to exit at tens of millions of dollars. In those situations, the appreciation happened after the transfer had already occurred, potentially removing millions from the taxable estate. Typically, the further you are from exit and the more uncertain a transaction may be, the bigger the discount one can take in transfer value. When the valuation is lowest, you can potentially secure the highest tax reduction for your family or heirs two to three years later.
Timing Matters More Than Most Founders Realize
The valuation process itself also matters tremendously. Any valuation used for transfer purposes should be prepared by a qualified and certified valuation expert. Founders should work with companies and/or CPA firms that specialize in valuations and make sure they provide the right context at the start, i.e., “I seek a valuation for transfer purposes.” You want to get a valuation for transfer purposes. You are not looking for an appraisal; you are looking for a valuation. The result may feel like “calling your baby ugly” but this only a baseline for transferring future upside.
Timing becomes even more important as an exit approaches. Every day that brings you closer to the exit, your valuation is probably going up. Once a buyer enters the picture, many planning opportunities disappear. There are also many strategies that you cannot employ right before an exit. For example, if your company was previously valued at $20 million but you now have a Letter of Intent for $50 million, many planning opportunities disappear. At that point, your company is ultimately worth what someone is willing to pay and it is documented.
Preserving Wealth for Future Generations
Sophisticated estate planning is about far more than simply transferring wealth. In many cases, it is about maintaining control or access to funds without direct ownership of those assets. Properly structured strategies can allow founders to preserve flexibility and future access to capital while removing appreciating assets from their taxable estate. Because those assets are no longer personally owned, future appreciation may avoid federal and state estate taxes, which currently carry a top rate of 50%+ above applicable exemption thresholds. For many founders, that realization changes the conversation entirely.
With the current federal lifetime estate and gift tax exemption at approximately $19 million per individual, or $38 million for married couples, assets above those thresholds may still face estate taxes at rates as high as 50%. By transferring ownership before a sale, founders may be able to move future appreciation outside of the taxable estate altogether. In many cases, that means creating long term financial security for children and future generations with wealth that otherwise could have gone to the IRS.
Proper planning empowers founders to determine their “magic number,” understand how much they truly need or simply “want” for their own future, and thoughtfully part with ownership of a portion of the business without compromising their long-term financial goals or security. The goal is not to transfer assets that you may ultimately need or desire. It is to plan with assets above your needs or that may already be earmarked for others based on your goals and objectives. It is to create a comprehensive plan that balances future lifestyle needs with the opportunity to strategically move future appreciation outside of the taxable estate.
For example, a founder with a $20 million (presently values) company could theoretically transfer 40% of the business before a sale (using a mere $5.2M of their lifetime exemption $20M x.40 x 65% potential discount), potentially reducing future estate exposure significantly while still maintaining direct or indirect access to funds and liquidity. With the right structures in place, sophisticated estate planning can create flexibility, preserve control, and position future generations for long term financial security. This same business exits for $80M, $32M is available for the family and only used $5.2M of lifetime exemption (with no cash out of pocket) and plenty of remaining exemption for future gift and planning if desired.
Planning Early Leads to Better Outcomes
The founders who achieve the strongest outcomes are rarely the ones scrambling once a deal is already in motion. They are the ones who understand early that exit planning is not a last-minute exercise. It is a multi-year strategy built around timing, preparation, and flexibility.
At the center of the conversation is one simple question: Would you rather give your family a dollar that cost you $.20 or $.80?