Business owners, and entrepreneurs alike, face a unique set of challenges when going through a divorce. Determining an accurate valuation for any business involved in a divorce case can be extremely difficult. Even businesses which were owned exclusively by one spouse prior to marriage may be considered marital property if joint funds and/or labor contributions from the other spouse helped grow or maintain the business. In order to determine the value of a business, one of three valuation procedures will typically be completed by one or both spouses, their attorneys and/or financial experts hired by one or both parties. Generally speaking, as the anticipated value of the business increases, the complexity of the analysis and the importance of working with a highly skilled divorce lawyer also increase.
Marital vs. Individual Property
Before determining the value of any business interest held by either spouse, the ownership of the business must first be evaluated. Business interests that were held before marriage and not maintained with any marital funds and/or labor contributions from the non-interest owning spouse are not included in the marital estate as they are considered individual property. Many businesses, however, are started during a marriage and/or maintained or grown with the help of marital funds and/or labor from one or both spouses. In this latter case, all or a portion of the business is considered marital property and its overall value must be fairly distributed between spouses in the divorce decree.
What Percentage of a Business is Considered Marital Property?
Depending on when the business was started and how much it changed in value since the marriage began, any portion of a business can be considered marital property. Businesses created during the marriage and funded with joint assets are generally separated equally in the divorce decree, yet businesses that were owned by one spouse prior to the marriage but nurtured and grown with the help of marital funds and/or labor from the other spouse may be more challenging to separate fairly. In an ideal situation, records showing the amount of marital funds that went into the business will be available and the amount of any resulting growth and/or profit can be calculated. In this scenario, the spouse who did not originally own an interest in the company is entitled to half of the invested marital funds and an additional half of any increase in the overall value of the organization.
Common Methods to Determine the Value of a Business
Determining a value for any business can be challenging, even when expert help is involved. To formulate the most accurate estimate possible, one of the following three methods are typically utilized:
- The market approach. If the value of a similar business can be determined through public records of sale or another reliable method, the market approach can be utilized to value a business in a manner similar to that used by an appraiser who valuates a home prior to sale. While this method works well in some situations, it can be difficult to find comparable businesses.
- The asset approach. When the value of a business can be determined by simply calculating the total assets and subtracting the total liabilities, the asset approach is a straightforward method in valuing a business. Valuations for small businesses with tangible products such as company vehicles, salable inventory, buildings and other items having easily determined individual values can often be completed through this approach without the assistance of a financial expert (unless spouses disagree as to the value of the business assets and/or liabilities).
- The income approach. The most common and potentially most complex method of valuing a business considers not only the current assets and liabilities of a company but also any long term potential profit and risks. One or more experts (representing each spouse individually) will complete an analysis of the entire organization to determine an estimate of its overall value. The experts may be licensed as an Accredited Senior Appraiser (ASA), a Certified Business Appraiser (CBA), or a Certified Public Accountant (CPA). When the value of a business is significant, independent experts hired by each party may arrive at substantially different valuation figures; in this case, the presiding judge will make a final decision based on evidence presented in court.
The Importance of Working With Professionals
Working with a professional family law attorney is critical to ensure you are receiving or preserving your fair share of marital property. In some cases, your attorney will assist in determining the accurate value of any business involved, but he or she will also advise you when the testimony of a financial expert would significantly strengthen your case in court. Business interests are unlike other assets in that their long term potential to generate profit can far exceed the value of their current inventory, so use diligence during a divorce if either you or your spouse is a business owner.
An experienced California family law attorney can help you strategize and ensure a fair outcome in your divorce case. Call our Brentwood, CA, offices at 888-228-1098 to schedule a confidential consultation.