How a Business is Valued in a California Divorce

When you’re going through a divorce, it feels as though you’re deconstructing your life one piece at a time. It’s even more complicated when you and your spouse run a business together. A mutual enterprise quickly becomes one more asset to inspect, evaluate, and sometimes dismantle. Like everything else spouses buy, build, or acquire during a marriage, businesses are community property. As with other property you share, someone you don’t know could make important decisions about your business. 

As joint owners, you and your spouse must produce evidence to address your business’s value, community property interests, income, and other key financial data. Of course, some businesses are more complex than others. Even if you own a small, uncomplicated, Mom & Pop operation, you need a business valuation expert to answer and address relevant issues.  

A Certified Specialist in Family Law

Attorney Steven M. Bishop understands that family businesses often add layers of complexity to an already complicated situation. As a Certified Specialist in Family Law, Bishop has helped clients resolve community property disputes. He recognizes the importance of involving an experienced business valuation professional. They provide a clear, unbiased value assessment that can help you manage your community property challenges. 

Why do You Need a Business Valuation?

In distributing community assets and liabilities, the court has the final say about what is fair. As a divorcing couple, you retain control over the decisions if you work out an agreement ahead of your trial. Whether you hammer out a distribution agreement for your business or you let the court decide, a professional business valuator helps both you and the court make an informed decision. 

Of course, you know your business intimately. When you’re involved every day, you have a feel for how your business is doing and where it’s going. You track your cash flow, sales, payables, and receivables through timely bookkeeping. Financial reports provide organized data to help you monitor your progress. Annual tax filings require that you review your overall financial picture.

A business valuation provides another critical piece of financial data you might not have considered before. It tells you how much your business is worth. A valuation assigns a cash value that makes it easier when dividing community property. 

Choosing Your Expert

As joint business owners, both spouses should exercise some control over your business valuation. You must manage it in a way that allows you to feel confident in the process. You can hire a single expert to represent both your spouse and you, but each party has the right to hire an expert of their own. Evaluating your business is an in-depth process. It ultimately affects the fairness of your property distribution. It’s essential that both parties feel comfortable with their choice of experts. 

Based on California Family Code, Division of Property, §2552, the court considers your assets and liabilities “…as near as practicable to the time of trial…” The court may allow an earlier valuation date. You or your spouse must make a request and show good cause that an alternate valuation date would better accomplish an equitable division.

In addition to your business’s value, the court reviews these factors.

• Each spouse’s part in developing or operating the business. 
• Day-to-day control 
• Ownership status
• Whether the business is a separate asset
• Increases or decreases in the business’s value since the separation

The Business Valuation Process

A business valuation is a complex process. All valuation experts review your financial records and rely on varying approaches and methods to reach a final figure. Whatever expert you chose and however your expert performs their appraisal, they review key pieces of financial information. 

• Current debts and liabilities
• Fixed assets and values
• Accounts receivables, payables, and tangible assets
• Reputation, goodwill, and other intangibles

Valuation Approaches and Methods

In evaluating your business, an expert chooses an approach and a method. 

Asset Approach

Several methods allow value analysis based on the cost to buy a similar business. 

• Adjusted Net Asset: Determining the fair market value of equipment and other business assets as of the required valuation date
• Liquidation: Determining a value based on the outcome of liquidating the assets of a closed or closing business 
• Book Value: Considers asset values as determined by financial accounting (technically lower due to allowable depreciation) 
• Excess Earnings: Considers higher than reasonable earnings produced by a business’s standing or goodwill

Income Approach

Using this approach, a business valuation expert determines the present value of projected business potential. 

• Capitalization of Earnings: Considers your business’s net present value and the expected return on investment (capitalization rate).
• Discounted Earnings: Assesses value based on projected future cash flow discounted it to present value. 

Market Approach

Some experts arrive at a value based on recent sales of comparable businesses. Valuation methods include:

• Public Company: Based on financial data from publicly traded companies 
• Company Transactions: Uses values from comparable businesses with similar structures
• Discretionary Earnings: Based on a multiple of the annual financial benefits from a business (multiplier varies depending on the business type)
• Gross Revenue: Based on a company’s net sales or gross revenue 

The business valuation process is far more complex than these simple descriptions suggest. It becomes even more complicated when the roles are unequal. Problems arise when one spouse owned the business prior to the marriage or one spouse put more effort into building the business. The case, Pereira vs Pereira set the standard for a non-owner spouse seeking to prove that they contributed to the business’s success. The case, Van Camp vs Van Camp addresses community property businesses where a business’s success wasn’t related to a community effort.

A business valuation is vital when you own a business jointly with your spouse. Your expert should have the experience to use an evaluation process that best suits your circumstances. Your attorney can help you determine if it’s best for you to work out a division agreement with your spouse or wait for a judge’s ruling. 

Contact The Law Offices of Steven M. Bishop

Before you hire an expert to review your business, consult with an attorney Steven M. Bishop for recommendations. He provides guidance and assistance in choosing an expert with experience that’s relevant to your business. Attorney Bishop has assisted many clients in resolving complex community property issues.

To schedule a consultation, call our office at (619) 299-9780 or complete our Contact Form.