Recent Posts in Valuations Category

Q.  My Wife is a personal injury lawyer with a good practice which she started six years before we married. We have been separated for nine months, after nine years together. She just sent me a settlement agreement. It says the law practice is ordered to her, but it says nothing about me receiving any money for that. She says that since I am not a lawyer and can't practice law, and I get no share of its value. Is she right?

A.  No, assuming it has a value that is greater than its value on the date you married!

The fact that you are not a lawyer has nothing to do with whether the "community estate" (the two of you as an economic unit) has an interest in the business that must be reimbursed. This would be true if she or you were a doctor, married to a person who isn't, and so who must have a license to practice their trade.  Obviously the law practice must be awarded to her in your dissolution, but that doesn't mean she won't be forced to buy you out as though you were a licensed "silent partner."

When people marry or become domestic partners, they commonly already own assets like businesses or professional practices. This is especially likely for those who've been previously married. 

During marriage a professional-trade spouse may increase the worth of a business they manage, whether as a sole proprietorship or as a shareholder of a professional corporation. Per Family Code section 760, all economic value that is created during marriage is presumed to belong to both parties. Value in this sense is measured by a benchmark date, and these dates vary according to circumstances and scenarios. This is called the "date of valuation", but there may be more than one. What gives rise to the community property interest is either spouse's contribution of time, skill, and efforts (TS&E) to - pretty much whatever - from the period from the DOM (date of marriage) to DOS (date of separation). 

By the way, a prenuptial (or post-nuptial) agreement may waive a legal interest derived from these TS&E increases, meaning that the community estate acquires no interest in the separate property of the business-owner spouse. I assume you didn't sign one. 

Unless you've waived the community property interest in your wife's separate property, it is a breach of interspousal fiduciary duties to deprive the community estate - of which you own one-half - of increases to a party's separate property resulting from TS&E. This means that the community (and separate) interests must be priced in terms of recent or present values. Always a controversial area. Once  you physically separate, all your wife's TS&E belongs once again to her alone.

After separation a business or professional practice may likewise increase in value through continuing TS&E type contributions. These may be reimbursable to the separate property estate of the managing spouse and so backed out of the community interest, because it is likewise unfair that the community should benefit from separate property efforts. 

There are three time periods relating to the value of your wife's practice that matter here: (1) the value of the law practice as of the date you married, (2) the increase in value (if any) that occurred during marriage that existed as of the date of separation, and (3) at the time of trial. Indeed, California law presumes that the property date for valuing an asset is at trial. Family Code section 2552.

Legal professionals refer to this manner of calculating the community property interest as an "apportionment" or "equitable apportionment."

There are two basic apportionment "formulas" that California judges are trained to apply in these situations: 

• Fair return on investment . This is called the Pereira approach to apportionment, after Pereira v. Pereira (1909) 156 Cal. 1, 103 P. 488, which involved a husband saloon owner. It apportions a "fair return" on the owning spouse's separate property investment in the business as separate property, then apportions any excess to the community property as arising from that spouse's efforts during marriage. 

• Reasonable compensation . This is the Van Camp apportionment method, which derives from Van Camp v. Van Camp (1921) 53 Cal.App. 17, 199 P. 885 (yes, seafood in Long Beach), which apportions the reasonable value of the spouse's services during marriage as community property, then treats the balance as separate property attributable to the normal earnings of the separate estate. Reasonable compensation is typically the analysis used in small business valuation cases, and is often found by looking at what other people in the same field performing the same functions tend to earn.

Either analysis (and there are hybrids and others) may be performed to determine the value of the premarital interest in separate property and in deriving the community interest in what began as separate property. 

These methods deal with the first half of your question - valuing the law practice as of the date of separation. They may have to be applied in reverse to back out the separate property contributions after the date of separation when a business is valued at time of trial.

Trial courts can pick the approach that they reasonably conclude makes the best sense given the facts of each case. In achieving the apportionment between separate and community property the Court has discretion to decide which formula will achieve 'substantial justice' between the parties.

The Pereira formula is commonly used when business profits are principally attributed to the community efforts (i.e., during marriage).  Van Camp is applied when the community efforts are more than minimally involved in a separate business, but the business profits that accrued are attributed to the character of the separate asset (Mr. Van Camp was turning out cans of tuna before marriage).

I'll write more on this fascinating subject.

I have residential property in La Quinta  My wife and I are divorcing and in the process of splitting assets.  She and her parents employed * * * of * * * in Palm Desert to value the property.  I'd like a second opinion regarding its value.  

I need some help in getting an honest appraisal.  What would your fee be to provide some help in finding an appraiser?

Thanks.

Frederic

Thurman

Stock options that are earned during the marriage, but vest afterwards, generally belong to the community. They are treated as deferred compensation, like certain types of pensions. Usually an employee is granted the right to buy stock, now or in the future, at a fixed price. They may be forced to sell that stock back to the company if they leave. What controls whether the options are characterized as community or separate is when they are granted and when they vest. If they do not vest at all, as where a minimum number of years of service by the employee are required which is not met (even where the employee-spouse quits after separation and so blows them up), they are neither separate or community property - instead, they are not viewed as a property interest at all.  In those cases they were a "mere expectancy" that never matured.

In cases where an employee must work for the company for a fixed number of years to be eligible, but the spouses or RDP's separate before those years have been served, the options have both community and SP attributes. To the extent that they result from post-separation efforts too, they must be apportioned between CP and SP. As with how interests in pensions are commonly evaluated, courts tend to follow a "time-rule". The time rule looks like this:

DOG to DOS
__________  X  # of Shares Exercisable = C/P shares
DOG to DOV
    
        DOG = Date of Grant
        DOS = Date of Separation 
        DOV = Date of Vesting

Stock options that are granted after the DOS are usually treated as the separate property of the recipient, even where some of the employee's contributions occurred before. This is because of the importance of what the employer intended to the analysis.

This Blog is intended just to give you some sense of the law over these potentially complex questions. As with everything, different facts can lead to different outcomes and stock options are complicated financial devices. 

Also, stock option disputes sometimes involve claims of fraud - as where a small closely held company or family business tries to funnel or manipulate how when the options are granted or vest in an effort to favor one spouse over another. 

Perhaps the only practical way that a former spouse or partner may learn that stock options exist or when they vest or are exercised is by the self-disclosure of the employee. The law is clear that spouses and domestic partners are required by their fiduciary obligations to make these disclosures. Refusals to disclose can have severe consequences under Family Code section 1101.

    * In-Kind Division: Each party takes one-half of assets such as bank accounts and stock in a corporation, and/or one-half of the debts.

    * Trade-off Division: You may stipulate to settle your property disputes, without regard to value, by agreeing one of yoiu will take certain items of property, e.g., the furniture, and the other will take other items, e.g., the car.

    * Piece-of-Cake Division: This method gets its name from the common situation where two children have a piece of cake to be cut in half. To avoid the argument over who gets the "bigger" half, it is agreed that one will cut the cake and the other gets to choose which piece he or she will receive. In the marital property context, one party makes up two lists of the property in question that he or she believes are equal, and the other party chooses which list of items she or he will take. (You may want to agree not to break up sets, e.g., a dining room set, a set of dishes, matching art works, etc.) The piece-of-cake method is particularly useful for dividing furniture and furnishing that usually have a real value to the parties far in excess of their fair market value. The method is also useful in short-term marriages for dividing wedding gifts.

    * One Values, the Other Chooses: One of you places a value on each item of community property in dispute and the other party chooses those items he or she will take at the stated value up to one-half the total value. Alternatively, the party choosing may choose any, all, or none of the items, with any items not chosen going at the stated value to the one who set the value. An equalization payment can be required. In dividing furniture and furnishings, an alternative to piece-by-piece choice is to list furniture and furnishings room-by-room, and each party chooses by room.

    * You Take It or I Will Take It: One party places a value on an asset at which that party is willing to let the other party be awarded the asset, or else the former will be awarded the asset at that value.

    * Appraisal and Alternate Selection: An appraiser is selected by stipulation to value each of the items in question. The parties then choose items alternately until all items are taken. The one to make the first choice can be designated by the flip of a coin. Another approach is to let one party go first and the other party then gets two selections, after which choices are made alternately. It is usually preferable to agree that sets not be broken up. It might be agreed that if a party takes a set it counts as that many choices, e.g., a dining room table and four matching chairs counts as five choices, and the other party then makes the next five choices.

    * Sale: The parties agree that the items in question be sold at a public sale or to a particular buyer with the proceeds divided equally, or in whatever other proportion is necessary to accomplish a satisfactory or equal division, considering the other marital assets or obligations each is receiving. For modest furniture or furnishings, the sale may be a garage sale.

    * Sealed Bid: Each of the parties submits a sealed bid on each item of property in dispute, using the same list. The bids are opened simultaneously and the one bidding the highest amount for an item gets that item valued at the figure he or she bid, with an equalizing payment to be made, if necessary. This method can also be used for disposition of the family home, other real property, or a family business that both parties have operated, where each seeks to have it awarded to him or her.

    * Interspousal Auction: This is a straight auction between the parties, usually with an agreed minimum incremental increase over the last bid being required. The high bidder gets the asset at the amount of his or her bid with an equalizing payment being made, if necessary. To the extent a major asset is involved such as a family business or real estate, the stipulation might provide that each of the parties have an advisor present during the bidding.

    * Arbitration: The valuation and division of the community property in question is determined by an arbitrator selected by the parties. The parties should understand that the arbitrator is not required to follow the law, and his or her decision, for all practical purposes, is final and not subject to appeal. Because arbitration usually takes much less time than a court trial, the parties might consider stipulating with your consent that you hear the case as an arbitrator.

    * Mediation: Mediation is greatly underutilized in family law cases. It can be a very effective and satisfying way for the parties to reach agreement on the value and division of their marital property.

    * Real Property: If both parties want community real property, one of the foregoing methods of resolution can be used. If neither wants it, it can be listed for sale with a broker stipulated to by the parties, at a listing price recommended by the broker. If one wants the property but the other feels that he or she is offering too little, the latter can list it for sale with a broker of his or her choosing. If the property does not sell within a specified period of time, the listing price will be periodically reduced until it reaches the figure where the net proceeds would be equal to what the other party offered. The property then goes to the offering party for the amount of the offer.

    * Combination: When more than one marital asset is in dispute, one of the foregoing methods might be used for one asset, while one or more other methods might be used for other assets.

• Evaluating sales proceeds

• Comparables

         The specific asset is valued based upon the actual sales of similar assets or properties with actual sales that can be tracked. With professional practices, this is common with dental businesses which are commonly bought and sold, and so numbers from the sales of other dental practices may be persuasive to a court. Whether this method is useful depends very much on the nature of the business - sometimes there is nothing comparable or little published information about comparable sales. Comparables are also considering in setting the value of real estate. 

• Liquidation value

Sometimes businesses will be cut up into parts that are sold separately.  Sometimes the business is valued in terms of what these parts would sell for. It is rarely used except when the parties intend to actually liquidate the company. Liquidation value does not generally include valuing goodwill (because the assumption is there will be no on-going concern). Goodwill is the nightmare component to valuing businesses. Many people in divorce who manage the business believe strongly this is how businesses should be valued (in part because in the absence of an actual sale, it is a fiction to say what a buyer might pay when no such buyers as a practical matter exist).

• Book Value

This relies upon the company records to determine what 'retained value' is. It is rarely used, because it is more a statement of how the company perceives itself, or structured (or even 'cooked') its books, than any objective indication of value.

• Adjusted book value

This is performed through a forensic audit. Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.

• Going concern value

This describes a method that includes valuing the business as greater than the sum of its parts. There are a number of factors that are used.

• Capitalized earnings

This is the most common method for valuing businesses used in California because courts find it to be most reliable. If you hope to use a different method, you will need to justify why that method is fairer to the out-spouse. This method requires expensive forensics. 



It is not uncommon to bifurcate the question of business valuations to try them separately because often this is the thorniest issue to be decided in a dissolution or legal separation proceeding.  



The law of business valuations is extremely complex and even contradictory. The purpose of this blog is merely to introduce the concepts. I will develop these themes in more detail in additional family law blogs.