Methods of Business Valuation
In any divorce where one or both parties are business owners the most pertinent analysis will be the characterization of the business as community or separate property. A simplified version of California community property law indicates that a business is community property if it was started during marriage and separate property if started prior to marriage or after the date of separation. However, many other complicated code sections or case law principals may apply depending on actions taken by the parties during marriage with respect to the business – whether community or separate property. An experienced family law attorney will need to gather pertinent facts before making a characterization determination for a business.
The good news for the business owner is that generally he or she is able to continue running his or her business during the divorce process and after divorce. If the business is characterized as separate property, the business owner will not have to sell the business, give any of it to his or her spouse, or pay his or her spouse out for a waiver of any interest in the business. If the business is community property or acquired some community component, the business must generally be valued because the business owner will likely have to “buy” his or her spouse’s interest in order to take the business in the divorce. With a business valuation, the parties can easily determine how much value should be placed on the spouse’s ½ interest in the community portion of the business.
With the vast range of business types, the parties will have to determine the appropriate method for valuation of the business in their individual case. The following is a summary of common business valuation methods:
Fair Market Value: In determining the fair market value, the parties must ascertain what the business would sell for on the open market with a willing buyer and willing seller. To conceptualize this method, consider valuation for property such as a house or a vehicle. Those assets are valued by determining how much the parties could sell them for. The same method could be used for certain businesses.
Investment Value: In determining the investment value, the parties must ascertain what an investor would pay to buy the business to earn a return on the investment and have the investment.
Asset Value: The asset value of a business is the total value of all of the assets without consideration of goodwill or other items. Goodwill is the ability to earn superior earnings due to reputation, location, unique product, years in business or some other factor as compared to other businesses. Goodwill is often used in valuation of specific businesses such as law firms or medical practices. If asset value alone is used for the valuation of a medical practice, the parties will only consider the value of substantial medical equipment and other tangible assets.
Please contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only attorney in San Diego County representing clients in divorces, who is a Certified Family Law Specialist (CFLS) and who is actively licensed as a Certified Public Accountant (CPA). Don't settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.