Business Valuation In Divorce
The attorneys at Miller & Associates, Attorneys LLP, are very well-versed and experienced in dealing with businesses in the context of divorce. Businesses create important issues that need to be analyzed in a divorce, which include whether there is a community property interest in the business that needs to be determined, and what income paid to the key operator of the business is available for child support or spousal support calculations.
It is important to hire a business valuation expert to properly value the business. It could be that upon a preliminary review for a very minimal cost, the expert determines that there is little or no value to the community worth arguing over or discussing. In most cases, however, there will be value to the business and the expert is required to determine that value. Parties in a divorce can either hire an expert together, or they can each hire their own expert. Our attorneys at Miller & Associates have many years of experience working with these experts and will guide you to the expert that is best for your case.
In valuing a business, there are many things to consider and the process can be very complex. The following are just some of the issues and considerations that go into a business valuation. Our attorneys at Miller & Associates are well-versed in this area to properly advise you.
- What is the date the business will be valued? Typically all assets will be valued at the time of settlement or trial, however in many cases it may be necessary for your attorney to file a motion with the Court requesting that the business be valued at an earlier time, such as at the date of separation, for many reasons.
- What if the value of the business declines after separation or drastically increased in value after the date of separation?
- What documents are needed for the expert to value the business? How do you obtain the documents?
- What standard of value should be used and who decides? There are various values that can be considered in valuing business. There is Fair Market Value, Investment Value, Fair Value, and Marital Value.
- What premise of value should be used? Should a Going concern premise of value be used or a Liquidation premise of value be used? The typical assumption used in divorce is Going Concern.
- It is also important to identify whether the spouse operating the business has 100 percent control or some lesser variation of control. If it is a corporation, does that spouse own a minority of shares or a majority of shares? If it is a partnership, then what percentage ownership does the spouse have?
- What is the intangible value of the company, and how is that valued? An example of this is the goodwill of the company. There are many elements to consider in valuing the good will of a company including whether there is good will that remains with the practice and is associated with the business, or whether there is goodwill that would go to the individual practitioner and is associated with a single individual (also called fractional goodwill). In California, both forms of goodwill are a marital asset subject to community property laws.
- What valuation method should be used? Capitalized Earnings, Discounted Cash Flows, Asset (cost) Approach, Market Approach, Excess Earnings Method, Transaction Method, or Guideline Public Company Method?
Is There A Need To Deviate From Fair Market Value When Valuing A Business In A Divorce?
If the business existed and was owned by one spouse before the date of marriage, then community property law in California dictates that the community interest in the business should be determined/valued using either the Pereira Method or Van Camp Method.
- The Pereira application would usually be used when personal efforts by the spouse during marriage are used which therefore contributed to the success of the business.
- The Van Camp application would usually be used when there was very little or no community contribution to the success of the business. Except for ensuring the community was reasonably compensation for work done for the separate property business, growth was generally attributed to outside factors other than the spouse’s efforts during marriage, and therefore any growth is considered separate property growth.