A Flipping Headache: Valuing a Business in Divorce
Divorce is oftentimes not simple, especially when a business is part of the marital estate. In California, where community property laws apply, both assets and debts acquired during marriage are presumptively community property and equally split. That includes businesses – whether one spouse founded a business or both were involved.
Why Business Valuation Matters
One spouse may want to continue running the business, while the other may simply want their fair share. Before any fair division can happen, the business must be valued.
Typically, this involves hiring an independent valuation expert, such as a forensic accountant, who can assess the financials and market position of the business. Often, the spouse most involved running the business will buy out the other’s interest, either with a lump sum, a payment plan, or by trading their share for another asset (like the family home).
Factors That Affect Business Valuation
Business valuation is not one-size-fits-all. Several unique factors play into how much a business is worth, especially during a divorce.
- Ownership Structure
Is the business solely owned by one spouse, or is it a partnership or family-run operation? If both spouses are actively involved, things can get messy fast. If the business has multiple partners or shareholders, assessing each person’s stake and legal rights becomes essential.
- Marital vs. Separate Property
A business started before the marriage might still be considered partially community property if its vale increased significantly during the marriage – especially if both spouses contributed to its growth, directly or indirectly.
Valuation experts may need to determine the business’s worth on the date of marriage versus the date of separation to calculate how much of the increased value should be divided.
- Goodwill
“Goodwill” refers to the intangible value of a business: brand reputation, customer loyalty, and even name recognition. Valuing goodwill can be tricky, but critical. It reflects the future profitability of the business and often has a major impact on the overall valuation.
- Economic Conditions
A business could be booming one year and struggling the next due to external economic forces. Divorce courts typically look at the value at the time of separation, but market conditions can still play a role in valuation negotiations.
- Business Debt
A business’s value is not just about its profits and assets. Debt, including loans, leases, equipment financing, and unpaid liabilities, must be subtracted from the total asset value to arrive at the “net” business value. What the business “owes” can dramatically affect what it is worth.
Methods for Valuing a Business in Divorce
There are four main methods commonly used in California family law cases:
- Market Approach
This method compares the business to similar companies recently sold. This method is best for common businesses with sales data. It is not ideal for niche businesses or if reliable comps are not available.
- Income Approach
This method bases the value on expected future earnings. It looks at past and current revenue, then projects future income to calculate a present-day value. This method is best for businesses with steady, predictable cash flow. It is not ideal for businesses that do not have reliable financial records.
- Asset Approach
This method bases the value by totaling its assets (both tangible and intangible) and subtracting its liabilities. This method is more straightforward, especially for businesses with valuable equipment or intellectual property. This method is best for asset-heavy businesses like construction and manufacturing companies. This method does not consider future earnings potential.
- Combination Approach
In many cases, using one method does not give the full picture. A combination approach, blending two or more valuation strategies, can provide a more accurate and defensible number in court.
Contact Cardwell Steigerwald Young, LLP
Business valuation in divorce is a strategic process that can significantly affect your financial future. Whether you are the business owner or the spouse of one, it is essential to understand your rights and options.
At Cardwell Steigerwald Young, LLP, our experienced San Francisco based family lawyers has helped countless clients navigate the financial and emotional complexities of divorce involving businesses. We partner with experienced forensic accountants to ensure no stone is left unturned. Contact our office today to help us guide you through the business valuation process.
