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Sonoma County Attorney to Help With Business Valuation Issues
Divorce is often complicated and stressful enough without adding in the complexities of spouses operating or owning a business together. Spouses never intend for their marriages to come to an end, but it does happen in Santa Rosa every day. Today more than ever before, married couples share a business they have created and nurtured. In some marriages, one spouse owns a business, which leaves both spouses concerned about legal issues. What is a business valuation in divorce, and what are the options for both spouses? Those in need of a business valuation should consider contacting Wine Country Family Law, P.C. at 707.669.0841.
Is The Business Separate or Community Property?
California is a community property state according to the Judicial Council of California. In Sonoma County and throughout the state property acquired during the marriage is considered community property. This includes businesses, whether started by one or both spouses. In the event of a divorce, courts typically divide property and assets equally between spouses.
What if one spouse began or acquired a business prior to the relationship or marriage? While the business would be considered separate property in this case, the legalities can be complex. During a marriage, an increase in value of a business may be considered community property. One spouse may have a private practice, or both may have businesses. Now it becomes easier to understand why a business valuation in divorce is so important.
Factors Considered in Assessing a Business Valuation in Divorce
There are several factors California courts use in determining the value on businesses that are privately held during a divorce. It is generally necessary to have a business appraised by a private service provider so that the valuation can withstand judicial scrutiny. This is the case whether the divorce goes to trial or is settled out of court. Factors California courts consider in business valuations include:
- Value of a business’s intangible assets such as accounts receivable
- The goodwill of the business
- Value of a business’s fixed assets
- Outstanding liabilities and debts of the business
In most cases, the courts are instructed by case law to give weight to several factors outlined by the Internal Revenue Service which include:
- If applicable, the capacity of the business to pay dividends
- The business’s earning capacity, book value, and financial condition
- The history and nature of the business since its establishment
- In addition to goodwill, any intangible value
- The outlook and condition of the business’s industry and general economic outlook
- If any, previous sales of ownership interests
The objective of all the factors combined is to arrive at a “fair market value” which is maintainable. Those with questions should feel free to reach out to an attorney with Wine Country Family Law, P.C.
Deviating From Fair Market Value
There are two methods used in California when a business was owned by one spouse and existed prior to marriage to determine community interest. These include the Van Camp Method and Pereira Method.
Van Camp Method
Used in circumstances where little or no community contribution is made to the business’s success. Growth of the business was generally due to factors outside of the spouse’s efforts during the marriage. Reasonable compensation for work completed for the business that was separate property was provided to the community. In this method the business’s growth is determined to be separate property growth. The increase in value of the separate property has little to do with the efforts of the spouse.
When the separate property value is predominantly the result of the time, skill, or effort put in by the spouse during the marriage, the Pereira method is preferred. The court can determine the value the efforts of the spouse who worked made. In a business valuation in divorce using the Pereira method, the legal rate of interest as a fair return on investment may be used when a practical amount is not presented.
What Documents are Necessary to Value a Business?
There are various business and financial statements that are used in valuing a business. The most common documents that may be requested by a business valuation attorney or expert include:
- Tax returns – typically the last two or three years
- Financial statements – Current period along with last three to five years, includes income and cash flow statements and balance sheet
- Business plan and organization documents
- Business projections and forecasts
- Business owner’s discretionary earnings – personal expenses that went through the business, owner’s salary, vehicle payments and more
Other documents that may be requested or helpful include recent equipment appraisals, equipment and facility photos, recent real estate appraisal or copy of lease agreement, and prior transactions. This is not an all-inclusive list, however those who own a business and are facing divorce can have a better idea of what may be needed.
What Is Goodwill in a Business Valuation?
Forensic accountants take several factors into consideration when determining a business’s goodwill. Essentially, this is the expectation that the business will continue to have public patrons. Factors that impact a business’s goodwill include but are not limited to:
- Longevity – years in business
- Reputation of both the business and its owner
- Size and type of clientele
- Business location
- Customer loyalty
Goodwill is something many business owners have a difficult time fully understanding.
Scheduling a Consultation with Wine Country Family Law, P.C.
As you can see, a business valuation in divorce is critical when one or both spouses own a business, or when a couple operates a business together. A business may have been formed by one spouse prior to the marriage. Both spouses may have created and developed the business over the years. Regardless, it is extremely important to understand how a business is valued when involved in the complexities of divorce. Those in Santa Rosa in need of legal guidance can schedule a consultation with Wine Country Family Law, P.C. at 707.669.0841.