Business Valuation and Divorce in Orange County: What You Need to Know
What You Need to Know Regarding Business Valuation and Divorce in Orange County
California is a community property state. When a couple files for divorce, this means any property which was acquired during the marriage, regardless of the name associated with the property becomes the property of both spouses. There are exceptions to this, for example, if one spouse got an inheritance, or won a personal injury lawsuit, the proceeds are the sole property of that spouse.
There are other complicating factors when it comes to a business. Some immediate questions which must be addressed regarding whether a business is considered community property, sole property, or are partly sole and community property include:
- Whether the business was started before the marriage
- Whether funds used to start or acquire a business were sole property
- What role the spouses had / have in the business
- Whether there is a prenuptial or postnuptial agreement which defines which spouse has sole right to a business interest
Because of the community property laws, when there is a family business, business interests, or a closely held business, the courts generally rule that business belongs equally to each of the spouses. When the business is deemed to be entirely community property or partially community property, a value has to be assigned to the business.
Types of Business Interests Which Are Impacted
It is important to remember there is more than one classification of business ownership which could require division during a divorce including:
- Professional Practices — lawyers, doctors, accountants, and other types of business which include those in which the spouse is the sole employee
- Commercial Real Estate — when one spouse holds ownership in a commercial property or holds rights to a commercial property, these rights would be considered a business interest during a divorce
- Copyright or Patent Rights — these types of rights may also be considered community property and be subject to division during a divorce
- Closely Held or Family Businesses — franchises or other businesses in which only family members participate may still be considered community property under certain circumstances
- Limited Partnerships — when one spouse has an interest in a partnership, the other spouse may also have an interest if such interest can be deemed as community property
- Business Interests in Larger Companies — when one partner owns an interest in a company this interest could be deemed community property in part or in full.
Complications in Assigning Business Value
Business valuation is not as simple as determining how much money a business is generating. Generally, to determine the value of a business, a Certified Public Accountant (CPA) would be hired and specifically told the valuation is for the purposes of divorce valuation. There are two methods which are commonly used to value businesses for a divorce settlement, the asset-based approach, and the income-based approach. Here is how each works:
- Valuing a Business Using Assets-Based Approach — to reach a value using this method, all assets less liabilities must be valued. This determines the book value of the business. Once this is done, the assets are adjusted to reflect the current fair market value. The final portion of the calculation requires the person evaluating the business assign a value to “goodwill”. This is valued based on how likely the business is to enjoy continued support from customers as well as their ability to generate earnings. Once these numbers are gathered, the final number would be the valuation.
- Income Based Approach to Business Valuation — this method is slightly more complicated and requires the CPA to use a multiplier as well as a capitalization rate (CAP). These rates are different than those which are used in the asset-based approach to business valuation. Using this method also requires the CPA to determine the overall earnings of the business and add back reasonable compensation for the spouse who operates the business.
Specific guidelines in Orange County may also have an impact on how your business is valued. Keep in mind, fixed and intangible assets, outstanding debts and liabilities, accounts receivables, and business history will all be considered when issuing a business valuation.
Family Law Firms Can Help with Expert Opinions
In many cases when a business valuation is required as part of an Orange County divorce, each spouse’s attorney may hire a different expert. When this occurs, it is common for the valuations to conflict with each other. In many cases, the differences are minor, but when they are significant, the spouses may work out an agreement as to which valuation will be used in their proceedings. Barring this, the court will determine the value based on the submissions by each spouse’s expert.
Property division is always complicated and when one or both spouses have business interests, there are several complicating factors. You may be feeling frustrated because you worked hard to build your business and now you are being asked to divide your interest in that business with a spouse whom you are divorcing. However, your spouse may also feel they have a right to part of the business, because of non-monetary support they contributed during your marriage.
You have a lot of issues to contend with during a divorce and one of the best things you can do is work with an experienced Orange County family law firm who has experience handling complicated property matters. Business ownership merely complicates an already complicated process and you need someone who can help you face these added challenges head on. You need to continue focusing on your business and preparing yourself for life after divorce.
Divorce is always stressful and when property division is further complicated by business ownership, it adds to the stress level. When you are looking for an attorney who has experience handling complex asset divisions, who is not afraid to attempt to work out a mutually acceptable agreement between you and your soon to be ex-spouse, contact Pedrick Law Group at 949-388-8682 and let us help. We have the experience and knowledge you need to help you maintain as much of the interest in the business you have worked hard to build as possible.