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Tustin Business Valuation Lawyer
Business Valuation in Divorce
Going through a divorce has many challenging aspects, but for business owner’s, the valuation and division of their business is near the top of the list. In a state like California with community property laws, splitting a business in a fair way that also keeps the business intact and successful can easily become one of the most contentious parts of ending a marital union.
Community Property vs. Separate Property
While some parties may agree to close or sell the business and split the proceeds, the more common scenario is that one spouse wishes to continue operating the business. In this instance, the spouse would be entitled to one-half of the reasonable value of the business to buy out their one-half share.
In California, you must first determine whether the business is considered community property or separate property. Generally, if a business was started during the marriage, it is considered community property to be divided equally between the parties, but if it began before the marriage or after the date of separation, it is considered separate.
That said, there may be intricacies involved in this determination, which makes is crucial to consult an experienced divorce attorney as early in the process as possible.
Separate Property Business Valuation
If the business is separate property, the value should be determined by either the Pereira or Van Camp method of business valuation. The Pereira method is used when a spouse’s efforts contributed greatly to the value of the business. The Van Camp method is used when factors besides personal effort played a greater role in the business’s success, e.g., market forces.
It is important to note that Courts have also used a “Hybrid” of these 2 approaches to reach an equitable result. Therefore it is very important to hire an experienced divorce attorney and a strong forensic expert.
Community Property Business Valuation
If the business is community property, the parties must agree on a business valuation method. The following are some of the most common options:
- Asset value: Asset value encompasses the total value of all tangible business’s assets, excluding intangible assets such as goodwill — the business’s reputation, location, or other unique aspects that would enable it to earn more. For certain types of businesses, goodwill could represent a substantial figure, so it is important to consider carefully whether this method is advisable in your situation.
- Fair market value: Fair market value represents what the business would sell for on the open market with a willing buyer and willing seller.
- Investment value: Investment value is what an investor would pay to buy the business to either hold the investment or earn a return on it.
Other Business Valuation Issues
In addition to deciding on a method of business valuation, there are also several other factors that the parties must agree upon, and these include:
- Date of valuation
- Documents will be considered in the valuation
- Goodwill and other intangible assets
- Percentage of control of spouse(s) involved in the business
Because the valuation of a business during a divorce can mean a huge difference in your monetary settlement, the time to talk to an experienced divorce attorney is now to make sure your interests are protected.