Divorce cases involving entrepreneurs and business owners often poses challenges when valuing a community business. Some litigants are part owner of the business while others own the business entirely by themselves or sometimes with their divorcing spouse. In California, there are several methods commonly used to value a business during a divorce. These methods help determine the fair market value of the business, which is crucial for equitable distribution of assets. The family code generally requires that assets be valued as close to trial date unless the court orders and alternate valuation date. Here are some common valuation methods:
1. Market Approach: This method involves comparing the business to similar businesses that have recently been sold. By analyzing comparable sales, market multiples, and other relevant factors, an appraiser can estimate the value of the business.
2. Income Approach: This method considers the future income potential of the business. It involves evaluating the company's historical financial performance and projecting future earnings. The appraiser then applies a capitalization rate or discount rate to determine the present value of expected future income.
3. Asset Approach: This method focuses on the value of the company's assets. It involves assessing the fair market value of the business's tangible and intangible assets, such as equipment, inventory, intellectual property, and goodwill.
4. Combination Approach: In some cases, a combination of valuation methods may be used to provide a more comprehensive assessment of the business's value. This can involve considering multiple factors, such as market data, income projections, and asset values.
The best method to value a business will depend on the specific nature of the business, its profitability, and its assets. It is important that both the forensic CPA and the divorce attorney have a thorough understanding of the business or businesses at issue in the case.
Now, who values the business in a divorce case? There are several options.
- The parties can try to value the business on their own. The parties may have an in-depth knowledge of the value of the business by virtue of being operators, but this can also result in undervaluation or over valuation. Also, if one spouse is the sole operator, it can place the other spouse in an extreme disadvantage.
- Hiring a joint forensic accountant for the business valuation during the divorce either pursuant to Evidence Code Section 730 or informally. A joint forensic accountant is one who both spouses trust to provide a proper valuation and on whom both spouses rely in negotiations that may lead to a settlement. A joint forensic accountant, like any forensic accountant, does not provide legal advice. Spouses who hire a joint forensic accountant can also utilize a separate forensic accountant to review the joint accountant's work.
- Each spouse can hire his and her forensic accountant for a business valuation.
Each spouse can hire their own forensic accountant for business valuation as their own expert. Typically, the court will order that the two experts do a side by side in their calculation of the business valuation in order to focus and isolate where the difference between the two expert valuations lie.
Dividing private businesses during the divorce poses challenges to divorce litigants where there is no readily available quote as to the value of the private business. As a result, heavy reliance is placed on the appraisal by forensic CPA who may have different valuations for the same business.
Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does create any attorney client relationship between you and the Law Offices of Kenneth U. Reyes, APC. This article is not a solicitation.
Attorney Kenneth Ursua Reyes is a Board Certified Family Law Specialist. He was President of the Philippine American Bar Association. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. He is a graduate of Southwestern University Law School in Los Angeles and California State University, San Bernardino School of Business Administration. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, APC is located at 3699 Wilshire Blvd., Suite 700, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail kenneth@kenreyeslaw.com or visit our website at Kenreyeslaw.com