California Family Law Attorney
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May 24, 2010
  What METHODS are used for VALUING BUSINESSES in divorce?
Posted By Thurman Arnold

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, these include:

  • 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.

  • 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.

Need more information about dividing businesses in California divorces?

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T.W. Arnold

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May 10, 2010
  What does it mean that a judge has ordered a 730 EVALUATION in my custody case?
Posted By Thurman Arnold

Q. My ex wife and I are fighting over custody of our three children. The judge decided to appoint a psychologist to interview us all. How does this affect me and my case?

What Are 730 Evaluations?

In high conflict cases where two sides have entrenched and opposing views about what is in the best interests of their children in terms of custody and visitation, California Evidence Code section 730 provides judges the option of appointing an expert witness to investigate the matter and report to the Court. This is often referred to as a forensic evaluationbut in California we typically call them "730 evaluations."

What this means for you is that your family is likely in trouble, since these custody "evals" only are necessary where parents are failing to pro-actively resolve their parenting issues. They can be quite expensive in every way. I describe the process here in part to help encourage you avoid it. Still, there are times when it can lead to a lessening of conflict and it may be inevitable in move away situations.

Forensic evaluations can be used in a number of other settings as well, including valuing businesses or real estate. It is extremely common in move away cases and in fact a strong argument can be made that to allow a parent to relocate with minor children in the absence of such a report (if it is requested) violates the due process rights of the non-moving parent [In re Marriage of McGinnis (1992) 7 Cal.App.4th 473, 9 Cal.Rptr. 2d 182].

In your situation the Court has likely appointed a Psychologist or Marriage and Family Therapist whose work is already known to the Court because that person is on a panel the Court uses, or possibly because one or both lawyers have worked with the expert and either recommended him or her to the Court. Often the parties' lawyers will agree upon this third person.

Reliable evaluators are not hired guns for either side. However, like everyone else they can have their own biases. To the extent that you can, it is always a good idea to get as much information as possible about a potential evaluator before a selection is made. Courts generally don't impose someone on the parties where one of them objects to that person, but in smaller communities there may be fewer options in terms of qualified evaluators.

It can be very difficult for a judge to determine the truth of claims between family law litigants, what their underlying motives are, whether there is some mental health or substance abuse undercurrent, and whether one parent is more likely than the other to foster an ongoing relationship between the other parent and their children. Courts don't have the time or resources to do much more than call balls and strikes based upon witness declarations or live testimony. Therapists and psychologists are able to spend time interviewing parents and sometimes have them complete psychological testing, they meet children, talk to teachers, visit homes, check with therapists who are seeing family members, and also interview significant others, new spouses, and other children in blended families. A much more reliable picture may emerge than that which comes from the parties' own descriptions of things.

These custody evaluations can be quite expensive, typically starting at about $2,500. They seem to average between $4,000 and $6,000, but the costs skyrocket with the number of people other than the parents themselves (often called 'collaterals') whose input is required.

It typically takes at least three months for an expert psychologist or MFT to complete all the necessary interviews and write a detailed report. In my experience the time frame is closer to four months. This report is then submitted to the attorneys and to the Court.

Most courts require this report to be submitted at least 10 days prior to a hearing, so that both sides have ample time to review it. If you are involved in a custody dispute and you or your attorney receive the report late, if you disagree with its recommendations you may want to object that you have not had sufficient time if you want a continuance; otherwise, the Court may adopt the recommendations at that hearing.

In almost all cases where a 730 report has been completed, either side may request that an evidentiary hearing take place with live testimony and the ability to examine and cross-examine witnesses - including the custody evaluator whose recommendations are being considered. Depending upon the urgency of the family's issues and the Court's availability, these hearings may not be set for weeks or months.

What If I Disagree With the Evaluator's Report?

In addition, if you feel that the evaluator failed to adequately investigate the case, or did not meet the standards of practice for such evaluations, you may want to consider hiring your own Evidence Code § 733 expert to advise you or your attorney on how to point out the shortcomings to the Court. This can be an expensive way to challenge findings that you do not agree with. The usefulness of 733 evaluators is limited because they do not get to perform a second evaluation (and rarely meet with the other party), and without conducting full interviews with all relevant persons they may be ethically bound not to render an opinion. Certainly their views won't carry the same weight with a judge as the full evaluator.

Contested custody cases will damage your children, guaranteed. I urge you to consider mediating your custody differences instead, either by using a qualified mediator or a mental health professional.

Want more information about custody 730 evaluations? Visit us here!

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T.W. Arnold III

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