San Diego Complex Divorce Lawyers
Explaining the Specific Steps of a Business Valuation

Business valuations in divorce are a complicated area of family law.  The experienced attorneys at the Men's Legal Center provide knowledgeable representation for business owners going through a divorce.

Buy-out

Normally, in divorce, the owner or the spouse who operates the business will be required to pay the non-operating spouse one-half (1/2) the value of the community property portion of the business.

The Court may require the parties to conduct a business valuation. The law requires that the business valuation method used be reasonable and account for all the factors affecting the value of the business.  As business owners know, there are many variables in the valuation of a business.

Factors in a Business Valuation

The law requires that a business valuation take into account the fixed assets, work-in-progress, cost advanced, accounts receivable discounted for collectability, taxes, cost of collections, as well as, goodwill as an ongoing concern, and business liabilities.

Family court has the option of using the fair market value ("FMV") of a business or the "subjective investment value."

It’s important to have an experienced attorney develop the list of factors to arrive at a fair valuation.

The Investment Valuation

The “investment value” is the subjective version or approach of the objective standard of FMV. Basically, the judge in Family Court can determine the value of the asset to the operating spouse. This is sometimes called the "marital value."

For example, the value of a closely held corporation may be determined by “investment value” rather than “market value” because a closed corporation stock is not actively traded and therefore there is no actual market value.

An investment valuation approach could use capitalization of excess earning, dividend paying capacity, book value, or net asset value.

Goodwill

The issue of goodwill is always a complex matter and for that reason is highly contested. Goodwill is the expectancy of future earnings based on the expectancy of future patronage of an ongoing business. The value of goodwill is the capitalization of excess earnings.

Goodwill computation steps include: Normalization of income, deduction of value of fixed assets by giving them a reasonable rate of return, and a determination of reasonable compensation of a similarly situated professional. If the normalized income is greater than reasonable compensation there are excess earnings. The excess earnings are then capitalized to come up with a value.

Many subtle issues arise concerning the appropriate time frame to determine the operating spouses' net income for determining value of excess earnings.

Men’s Legal Center attorneys’ experience, knowledge, and skill sets will help prepare and present your case in the best possible manner to help the court arrive at a fair valuation of goodwill, if any, based on all the many relevant factors involved.

Supported Spouse Gets Two Bites of the Apple

Child and spousal support may be based on the operating spouse's net income from the business, which includes the goodwill valuation.

Support is based on reasonable compensation, but also on the excess earnings/profit that the owner / operating spouse purchases in the valuation of the business.

The supported spouse is paid one-half (1/2) of the goodwill in the property equalization, but also these excess earnings are indirectly taken into account in the support level.

As stated previously getting the valuation of the goodwill right is important. The Attorneys at the Men’s Legal Center can bring their expertise to bear on the issue of valuating goodwill.

Income for Support

Generally, court ordered business valuations will also determine the appropriate net income of the owner / operating spouse in determining support.

The attorneys at the Men’s Legal Center will help develop the facts that should be used in reaching a fair net income for the owner / operating spouse.

The Business is Often a Mix of Community Property and Separate Property

Sometimes a business is entirely community property or entirely separate property, but often, a business is a mixture of both.  The formulas used to determine characterization of mixed assets are highly technical and complicated. It is very important to consult a qualified attorney when doing a business characterization.

Expertise Required

Representing a business owner in the valuation of a business for dissolution requires expertise. The attorneys at the Men's Legal Center can assist a business owner in using the most appropriate formulas, data, and date of valuation in presenting the facts to Family Court.

Using the wrong formula, or non-representative data, or an inappropriate valuation date could mean that the spouse running the business could end up paying a value for the business to the non-operating spouse far in excess of the business’s true worth.

If the operating spouse is ordered to buy out the non-operating spouse's interest at an inaccurately high valuation, the business may simply go under.

Call us TODAY at (619) 234-3838 to set up your initial consultation with an experienced attorney. The Men’s Legal Center knows you need “effective representation when so much is at stake!”