Business valuations during divorce

On Behalf of | Dec 6, 2021 | Divorce

Divorce profoundly affects every aspect of a couple’s lives, from their finances to their family if there are children. For the California business owner, it can set off financial and professional troubles, especially surrounding issues of property division. Since the business is often the largest item on the inventory of marital assets, its valuation has a bearing on how the court will determine property division.

If one spouse is the owner, a shareholder, or partner of a closely held business, anticipating potential entanglements with a pre- or postnuptial agreement is advisable to safeguard the business. But once the proceeding is underway, choosing the valuation method for the business is an essential part of the inventorying of assets. Residents of Oakland and San Diego can benefit from tips that will help them to protect their business post-divorce.

Choosing the optimal business valuation

 For the business owner, the stakes are high when it comes time to determine the value of the business. Both spouses may hire a professional to conduct the valuation. If a hearing is part of the divorce proceeding, it is best to complete the valuation as close to the hearing date as possible for the sake of accuracy.

The three ways of evaluating a business in divorce are:

  • Measuring assets against liabilities. This can become complicated, however, when assessing the value of the company’s inventory or office equipment, although the value of the company car and computers is straightforward.
  • Valuation based on market analysis. Least often used, this method determines valuation based on the value of other businesses of a similar size that have been sold. As family businesses are often relatively small, it can make them difficult to compare with other businesses.
  • Valuation of assets based on past and projected revenue. This is the most common approach in divorce proceedings and studies revenue, past performance and projections of future growth to assess the business’s value. Cash flows and profits are the areas of focus, with income being the total value of proceeds from the sale of goods and services, and investment-related proceeds.

Other factors affecting property division

California is a community property state, meaning that the court will usually divide all property acquired during marriage equally. Even if the business existed before the marriage, the other spouse may have a stake in it if they have a position with the company, or if marital assets helped finance the business.

The business structure may also impact how the court will treat property division in divorce. If it is a sole proprietorship, it will be subject to equal division. For a corporation with shareholders receiving dividends, on the other hand, the valuation will consider these assets.

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