Determining the value of a business in a California divorce case is often a complex process, depending on the company's size and assets. Family law lawyers can use the professional services of a certified public accountant (CPA) or valuation expert who will need access to financial records to complete this task.
An accurate calculation to determine the value of a company for the division of assets means specific documentation will need to be examined, such as:
- company's financial records,
- records of assets, cash flow, and debts
- tax returns,
- bookkeeping files,
- company inventory.
Even when experts are retained to value the business, the experience of a divorce lawyer can be crucial to resolving the issue.
It's common for a divorcing spouse to have no idea of the value of the other spouse's business, who primarily performs all the daily company activities. Many non-working spouses don't know they are entitled to a portion of the value of the business.
Even sole proprietorships for a self-employed spouse has a certain amount of value in the division of assets in a divorce. The analytical model valuation experts commonly use to assign value to a business can be complicated. Our California divorce and family law attorneys are familiar with dealing with businesses in the context of divorce.
Any company owned by a spouse can become hotly debated in a divorce, such as determining whether there is a community property interest and what part of the income is eligible for child support or spousal support calculations. Let's review this topic further below.
What Factors Are Considered in a Business Valuation?
There are several business valuation methods used by most experts, including the following:
- Income approach,
- Market approach,
- Asset approach,
- Capitalized earnings,
- Transaction method,
- Discounted Cash Flows.
The income approach uses the company's predicted future profits and cash flow to calculate a value.
The market approach seeks to value the company based on the sales of similar businesses within the same area. The asset approach is only used when the other methods have not produced a business value.
Again, as noted above, retaining a business valuation expert is essential to value the company properly. In most divorces, there will be some value to the business that can be assigned to a marital property for equitable division.
Our family law lawyers can help guide you through this process of working with experts to determine the value of a company.
When valuing a business, there are numerous factors to consider, and the process will often get complicated quickly, especially for professional practices and high net worth cases. While the list below is not comprehensive, it includes some of the most common factors considered in a business valuation:
- What is the date of separation between spouses? Perhaps the company's value significantly declined or increased after the couple split up.
- Did the business exist before the couple was married?
- What business valuation method will be used, and who decides?
- Which spouse primarily operated the company?
- What portion of the value falls under community property?
- Is the business a corporation, partnership, or other?
- What percentage of ownership does the spouse have?
- What is the company's intangible value, and how is it valued?
- What documents are needed to value the business, and how to get them?
What is the Income Approach to Business Valuation?
The income approach to valuing a business is probably the most used method for valuing a company, but often complex. Inside this approach, there are two methods that the experts use.
Each approach will use the company's past business performance, such as its net profits or cash flow, to estimate its future earnings.
The estimated future income of the company is then used to calculate its current value. The capitalization of earnings approach is typically used for stable companies with high earnings.
The discounting of the cash flow method is typically used for a business with earnings estimated to fluctuate. This method of placing a value on a company also uses past performance to predict future income.
Each income method approach will depend on the valuator's ability to calculate the cash flow and sustainable earnings.
Cash flow typically deducts the owner's salary from the business cash flow, which means the “profit” will be used to calculate future value.
What is the Business Reference Guide?
Many Certified Public Accounts and lawyers will use the rules within the Business Reference Guide (BRG) to estimate a business's value.
The rules are not always precise, but they are an effective way to determine whether a business will likely have substantial value in the division of assets in divorce proceedings.
Further, the BRG rules typically allow attorneys to quickly estimate the value of a company with limited documentation, such as profit and loss statements.
This reference guide should not be considered a comprehensive way to value a company. Still, it does provide a good starting point to begin the investigative process in divorces that involve a spouse-owned business interest.
Speak with Divorce Professionals About a Business Valuation
Many business valuators have a background in expert testimony in a California family law court.
Conducting a complete investigation into the value of a business, especially one with millions of dollars in profit annually, is a tremendous job. In fact, most high net worth or high asset divorces are long and complex when the divorcing spouses cannot reach a mutual marital settlement agreement.
The expert's responsibilities usually include interviews with high-level management employees, examining countless documents, and seeking unintentional or intentional inaccurate bookkeeping entries to hide assets.
Their final written report can be lengthy and complicated, which is one of the reasons they are asked to provide court testimony at trial.
If you need more information or seek legal representation in a California divorce involving the equitable division of business assets, contact our law firm to review the details and discuss legal options.
Furman & Zavatsky have experienced California divorce and family law lawyers. Our Certified Family Law Specialist offers a free case evaluation via phone or contact form.