If you or your spouse started a business after your marriage, the business is likely a marital asset and subject to property division laws during your divorce. As a community property state, California courts split marital assets equally between spouses.
To ensure you receive the correct share of the company, avoid these common business valuation mistakes.
Using an incorrect valuation method
Determining how much a business is worth can be a complex process, and there are multiple valuation methods to choose from. Commonly used approaches include:
- Asset approach, which bases value on the business’ total assets and liabilities
- Income approach, which calculates expected future earnings to determine the present value
- Market-based approach, which aims to determine how much the company would sell for by comparing it to similar companies
Not all methods are allowable in all situations. For example, California does not allow you to use the market approach to establish the value of a privately-held business by comparing it to a publicly-traded company.
Leaving out assets or liabilities
Whether by accident or not, failing to report and account for all assets and liabilities in the valuation can lead to significant legal and financial consequences. Make sure you and your valuator do due diligence to determine the full extent of the business’s holdings.
Not obtaining your own valuation
Because of the complexity of the valuation process, different valuators may come up with different results. Instead of relying on the opinion of the person your spouse hires, you should seek your own valuation to help ensure the most beneficial result for you.
You can take steps to protect your company before a divorce. Consider using a prenuptial or postnuptial agreement to establish what rights either spouse has to the business.