How is a Business’s Value Determined in a Divorce?

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You’re going through a divorce in California and your soon-to-be-ex is claiming that half of your business is theirs. And they just might be right. Under California community property law, and absent a valid prenuptial agreement to the contrary, property (assets, income, etc…) acquired during the marriage belongs to you and your partner. So how do you determine the value of your business?

Business valuation is a process and a set of procedures standard within the business community that are used to estimate the economic value of an owner’s interest in a business. Generally speaking, before the value of a business can be measured, the valuation assignment must specify the business value standard and premise of value.  The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt (sum of the parts or assemblage of business assets).

Not surprisingly, business valuation experts in family law cases rarely reach the same conclusion about the value of a business. In order to remedy this, many use the same standard in determining a business’s value. The methods the business valuation expert looks at includes:
  1. the income approach (converting anticipated economic benefits into a present amount),
  2. the market approach (comparing the subject business to similar businesses that have been sold), and
  3. the asset approach (taking the value of the assets net of liabilities).

The purpose of valuating a business in the case of a divorce or legal dissolution is to determine its fair market value so that a court can make a fair property division. The date of valuation can have an impact on the business’s value, which means you will want to work closely with family law attorneys experienced in dealing with complex business valuations and high net worth individuals.

For more information on how to value fairly value your business, contact the expert Los Angeles divorce attorneys at Walzer Melcher LLP today.