Business Valuation at Divorce
Valuation of many marital assets is not difficult. For example, residences are typically valued by residential appraisers. Although different appraisers may express different opinions as to the residence’s value, the methods used for the appraisal are typically very consistent and in the majority of cases, competing experts do not have wholly different opinions on the value of a residence. Conversely, in business valuation cases, different experts may have dramatically different opinions as to the community interest in a business and whether or not the community has any interest at all in the business.
What seems to be a simple question (is the business community or separate property?), is not always apparent and is often the subject of dispute. Generally, businesses that are created before marriage are separate property and businesses created during the marriage are presumed to be community property. However, in California, even businesses that are not community property (for example a family-owned business that one spouse owned prior to marriage or inherited during the marriage) may have a community property component. One policy reason behind this is a spouse’s expenditure of time, talent, and labor during the marriage are deemed to be for the benefit of “the community” and therefore community property. If a spouse has actively participated in managing the business during the marriage, then the question becomes whether the spouse who owned the separate property business has reasonably compensated the community for the time she spent running that business. If she has not reasonably compensated herself (i.e. the community) for her services, then the community has suffered a loss — and the community must be adequately compensated for those services rendered during the marriage.
Other Important Considerations
What valuation standards are used?
There are many different methods used to determine the value of a community business, these methods include: (1) Book Value; (2) Comparable Sales/Mergers and Acquisitions; (3) Capitalization of Cash Flow; and (3) Excess Earnings.
Does this business have Goodwill and if so how is that calculated?
Goodwill is often defined as the “expectation of continued public patronage.” For example, will the businesses’ customers continue to return? Are the businesses’ customers willing to pay a premium for its services? Goodwill is often nebulous because, unlike fixed assets, Goodwill generally is not identified in most balance sheets – it is the “blue sky” value that is part of the price which is in excess of the company’s net tangible assets.
What personal benefits (perquisites) does this family receive from the business?
Does the community business pay for automobiles, insurance, cellular phones, meals, travel, and entertainment? If so, Courts will often consider these personal benefits when valuing the business and when determining income available for support.
What date do we use to value the business?
Generally, assets at divorce are valued at the “date closest to trial.” Business valuations are sometimes the exception to this rule. If a business is heavily dependent on a spouse’s talent and skills, then it is very possible a court will value the business at the time the parties’ separated, and not at the date closest to trial. Small professional practices often fall into this category. Remember, a spouse’s talent and skill during the marriage is a community effort and the community must be compensated. But the converse is true after separation – a spouse’s talent and skill after separation belong to that spouse. If a business is not dependent on a spouse’s talent and skills (for example, the business makes widgets and the “managing spouse” does very little management of the widget company), then that business would more likely be valued at the date closest to trial.
Why Ford Family Law?
Determining the community’s interest is a complex undertaking that requires expert knowledge, experience and skill. Ford Family Law works with reliable, respected forensic accountants to develop reasonable, accurate and fair business valuations. With the assistance of our experts, we work to develop creative settlement strategies which often appeal to both parties in the divorce.