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.