Q. I own a business that I began shortly after marriage. Now I am getting
divorced. Is this community property even though my partner never worked
the business, and if it is what methods might be used to value it?
A. With certain exceptions where, for instance, there has been a transmutation
of a community property interest in a business to your separate property per
Family Code section 852 (which requires a writing signed by the party adversely affect showing
an intent change the character of property from community to separate),
all property acquired during marriage through the time, skill and efforts
of either spouse is community property.
Family Code section 760.
A business begun by one spouse after the date of marriage and before physical
separation will need to be divided in a dissolution or legal separation
proceeding, and if you and your spouse cannot agree on its value it may
need to be evaluated by an expert. This is usually accomplished under
the provisions of
Evidence Code section 730.
There are a number of methods that can be used to value a business, and
depending upon whether the business sells services or products different
valuation methods may be more appropriate than others. As a general overview,
- Evaluating sales proceeds
When a business is actually being sold in an arm's length transaction
to a third party, the price that a willing buyer will pay and a willing
seller accept determines value. This is rare in the case of business valuations,
but more common with respect to real property.
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.
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).
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.
This is performed through a forensic audit. Usually it is performed on
a cash basis, and accounts receivable and much more must be analyzed.
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.
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.
Need more information about dividing businesses in California divorces?
Need information about dividing professional practices?
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