Valuing Business Assets
California Divorce

Valuing Business Assets

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Dana and Michael owned a successful dentist practice with three locations. When their marriage foundered, the practice was in jeopardy. Dana was the dentist, with Michael serving as office administrator. Dana wanted the entire practice and, since that was her expertise, it made sense. Michael wanted other community property that equaled his half of the value of the practice. As is true with many divorces, valuing business assets became a contentious part of their divorce proceeding.

In any divorce, community assets are determined and then split. The divorcing couple may be able to iron out a divorce settlement that suits them both. However, when agreement cannot be reached, the courts decide who gets what. The final divorce settlement or judgment will take into account the value of the business.

What Courts Consider

The parties need to know what kind of information the court will be reviewing to come up with that final valuation:

  • The fixed assets of the business,
  • The accounts receivable and intangible assets,
  • Goodwill customers and vendors have toward the business, and
  • Debts and liabilities.

In most cases, courts may want answers to questions like:

  • What type of business is involved?
  • How did the business start?
  • What is the current financial condition of the business?
  • What is the book value of the business?
  • How much can the business expect to earn?
  • Does the business pay dividends or not?
  • How much is the company’s goodwill worth?
  • Have any other ownership interests been sold?
  • If the company is publicly traded, what is the stock worth?

So, it’s a given that if the business is community property, some type of value must be assigned. Otherwise, how will the court know how to divide the community property estate?

Methods of Valuation

The ways used in business valuation may depend on the type of business being valued. A real estate agency may be valued differently than a convenience store or car dealership.

For example, some types of business may best be valued by looking at comparables. Looking at comparable businesses may be useful when coming up with an average value of that type of business. For Dana and Michael, an appraiser may look at the value of dental practices of a similar size in the same area.

The liquidation value tells you how much the company is worth if it is sold. If Dana and Michael are unable to reach an agreement, they may consider selling the practice and splitting the proceeds.

Determining capitalized earnings is a common way of evaluating businesses in California divorces. This method uses the current cash flow, annual rate of return, and expected value of the business to come up with a final figure.

It’s Complicated

The attorneys at the Law Offices of Judy L. Burger are experienced at all phases of divorce proceedings, including business valuation. Call us at 415-293-8314 to schedule a private appointment or visit our website. We maintain offices in San Francisco, Marin County, Santa Barbara, Ventura/Oxnard, San Jose, Gold River (Sacramento), and surrounding communities. Our new Beverly Hills office will open soon.
The Mechanics of Business Valuation in California Divorces
California Divorce, Spousal Support

The Mechanics of Business Valuation in California Divorces

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In California, the assets of a married couple seeking divorce must be distributed on an equal basis to the extent they were accumulated during the period of marriage. These assets are known as community property. Sometimes, however, one party owns or has an interest in a business that preexists the marriage. That interest is considered separate property.

Even though a business interest may be considered separate property, part of any appreciation in value that occurred during the marriage may be allocated to community property. In order for that to occur, a value must be established for the business. This is a very complicated task that is performed by a variety of professionals such as business appraisers, certified public accountants, economists, and financial analysts.  

Business valuations normally use one of two methods, depending on the nature of the business. These two approaches were established in case law in the beginning of the 20th century and still stand today. Pereira v. Pereira, decided by the Supreme Court of California in 1909, and Van Camp v. Van Camp, decided by the Court in 1921, set the course for allocation of business value to community property.

The difference between the two approaches hinges on the participation of the owning spouse in the operation of the business. Under Pereira, if that spouse was an active operator or manager of the business, appreciation in its market value during the marriage is likely to be considered community property. This is often the case with professional services such as legal or dental practices, as well as with small contractors or retail businesses.

On the other hand, the Van Camp method usually applies if the business was of such a size and structure that the owning spouse did not expend personal effort affecting its income and growth. In that case, appreciation is less likely to be included in community property and subject to equal division. Any amount included would be based on an assessment of the owning spouse’s compensation from the business during the marriage, as well as whether that compensation sufficiently contributed to the accumulation of other community property. This approach would be appropriate for larger manufacturing, contracting, or technology businesses.

The methods of business valuation are complex, and they vary depending on the type of business involved. At a basic level, valuation involves establishing how much a business is worth at the time of marriage and at the time of divorce or separation. The difference in the two values is then considered in light of proper method noted above. Courts will generally accept a business valuation method as long as the evidence on the record legitimately supports the value.

As you might imagine, the value of a business and how it is allocated to marital assets can make a substantial difference in a what both spousal and support orders. If your marriage involves a business interest, you should hire an attorney with substantial experience in complicated divorce cases, especially those involving the valuation of business assets. Judy L. Burger and her team have considerable experience in contested family law matters, and Judy is well-versed in business matters. Submit our Contact form today or call (415) 259-6636 to arrange an appointment.

How Is the Goodwill of a Business Valued in a California Divorce or Legal Separation?
Child Support, Spousal Support

How Is the Goodwill of a Business Valued in a California Divorce or Legal Separation?

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The short answer to this question is that the goodwill of a business may be valued in any way the appraiser chooses. The longer answer is that the business appraiser may use any method that does not include impermissible values and that does include values that can be legitimately deduced from past results.

The goodwill value of a business is something that does not show up on the balance sheet. It is often an intangible aspect of the business that ultimately affects the bottom line. California Business & Professional Code defines goodwill in this way: “The ‘good will’ of a business is the expectation of continued public patronage”. It has also been described as a value that is different than capital stock or property of the business.

There are many different types of business that are valued in divorce cases, and, consequently, there are many different aspects to be considered by business appraisers when it comes to a goodwill value. Among the considerations are the following:

  • A regular and devoted customer base;
  • Reputation;
  • The length of time in business;
  • The likelihood that the business will continue in the future as in the past; and
  • The age of the spouse operating the business.

One of the prevalent methods of valuing goodwill is the Excess Earnings Method, which compares the business owner spouse to an employee of comparable experience in the same field. The method then factors in financial details from the performance of the business over a period of time to arrive at a value. The complexity of the method prevents discussion in this forum, but the salient point is that the method uses concrete financial information to arrive at a goodwill valuation.

Another method that has passed judicial muster is the Foster Method, which also uses a comparable salary coupled with financial data of the business. The common thread of these two methods that makes them acceptable to courts is that they are rooted in past performance of the business, and also take into account the likelihood of continued similar results.

The valuation of business goodwill also follows other basic tenets of divorce law. For example, business performance after the parties’ separation may not be used. Similarly, business profitability occurring prior to the marriage of the parties may not be included.

The valuation of a business, that is subject to community property distribution in a divorce, particularly the goodwill component, is a very complicated matter. Its complexity naturally gives rise to intense
How Is a Business Interest Valued in a California Divorce?
California Divorce

How Is a Business Interest Valued in a California Divorce?

For those going through a divorce or contemplating one, a common concern is how a business interest will be treated by the court. Sometimes, both spouses own a business together. Other times, however, only one spouse has an ownership interest in a business.

By law, California courts must make a substantially equal division of community-owned property. Therefore, the first step in deciding how to deal with a business ownership interest is to determine whether it is separate or community property. It may even be a little of both. If you are not familiar with basic property law in California divorces, please see our separate blog here.

If the couple started the business together and operated it together, the court will likely decide it is a community-owned asset. However, often, business ownership is not so clear. For example, sometimes, a business was started before the couple married. Other times, although one spouse may be the owner “on paper”, the other may have worked in the business and contributed substantial value to it. In more complicated cases such as these, the court will need to decide issues such as the value of the business at the time of marriage and the present, the value of spousal contributions to the business, and other difficult factual questions.

It is usually necessary, in these cases, to retain a forensic accountant. Forensic accountants are trained in both accounting and investigative techniques. For this reason, they can be invaluable partners in determining the value of a business and in presenting their valuations to a court.

Forensic accountants are experts at detecting irregularities in company records. Their findings can help demonstrate, for instance, if one spouse has altered company records to make it look like a business is more or less profitable than it really is. Ultimately, the accountant will give an expert opinion about the value of the business. One of three methods is typically used:

    • the income approach, which attempts to value future economic benefits;
    • the market approach, which compares the business to others that have recently been sold; and
    • the asset approach, which compares the relative assets of the business to its liabilities.
If the parties do not agree about how to divide a business ownership interest, the court will divide it for them, keeping in mind that their community property must be divided substantially equally. How this takes place is within the court’s discretion. Options available to it include awarding the business to the spouse who plays the greatest role in its operation, awarding it to the other spouse, dividing the stock ownership among the parties, and ordering the sale of the business.

Business ownership interests are among the more difficult issues that arise in family law, and how they are handled can affect the parties for the rest of their lives. The attorneys at The Law Offices of Judy L. Burger have extensive experience in all matters relating to property division, including dealing with business interests and forensic accounting. Make the call today to learn how our attorneys can protect your financial future: (415) 293-8314.