San Diego Complex Divorce Lawyers
Steps of a Business Valuation
If you own a business and are going through a divorce, the process of ending your marriage may be complicated. Business valuations can be extremely complex, but the experienced attorneys at the Men’s Legal Center can help you by providing knowledgeable representation for business owners in divorce proceedings.
A buy-out is one of the most straightforward ways for a divorcing couple to split the interest in an ongoing business. In a buyout, the business is valued at a certain price that takes into account all the factors that determine the company’s worth, then that price is split according to an agreement or a court order.
Under California’s community property laws, the business valuation method used must be reasonable. There are many variables to take into account in the valuation of a business, so it is important to fully understand the process of how a proper business valuation occurs.
Factors in a Business Valuation
California law requires that a business valuation take into account fixed assets, work-in-progress, costs advanced, accounts receivable discounted for collectability, taxes, cost of collections, as well as, other factors including goodwill as an ongoing concern and business liabilities.
To make things simpler, family court allows the use of fair market value (or FMV) of the business or the subjective investment value. The method used to determine the value of a business can either be agreed upon by the parties to the divorce or ordered by the court.
The Investment Valuation
Unlike a fair market valuation, an investment valuation or marital valuation is determined by a judge. This method is often used when FMV does not tell the entire story of the business’s true value regarding one or both of the spouses. For example, if a company does not publicly trade its stock, the value of the stock may not be apparent by the FMV method.
An investment valuation approach could use capitalization of excess earning, dividend paying capacity, book value, or net asset value to determine the value of the business.
When a couple has spent years building “goodwill” with clients, it is hard to make a financial decision as to the value of that commodity. Goodwill is a factor in expected future earnings based on current patronage of a business.
In order to calculate the value of goodwill, there are several factors that must be taken into account, including:
• Normalization of income
• Deduction of value of fixed assets by giving them a reasonable rate of return
• 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.
These are complicated financial processes, but with the help of an experienced attorney from the Men’s Legal Center, you may have a better chance of convincing the court to arrive at a fair business valuation.
Supported Spouse Gets Two Bites of the Apple
Sometimes when the court is ordering one party to pay support for the children and former spouse, the court uses the party’s business net income, including the goodwill valuation. This means that the party who gets the business may be in danger of having to pay a former spouse twice: once during the business buyout and again through spousal and/or child support. The expertise of the attorneys at the Men’s Legal Center can help you negotiate a fair business valuation that includes the possibility of future support so you do not suffer unjust financial hardship.
The Business is Often a Mix of Community Property and Separate Property
Another issue complicating a divorce that includes a business is the fact that a business may be both community property and separate property. The formulas used to value mixed assets are extremely technical and complicated; therefore, it is important to seek financial and legal advice when a business is being valued.
The attorneys at the Men’s Legal Center can assist you in using the most appropriate formulas, data, and date of valuation in presenting the facts about a business to Family Court. Using the wrong formula, non-representative data or an unsuitable valuation could mean that the spouse running the business will pay far more than the business’s true worth. This could ultimately lead to closure of the business.
The knowledgeable attorneys at the Men’s Legal Center understand how much is at stake with a business valuation. Call today at (619) 234-3838 to set up your initial consultation with an experienced attorney to discuss your divorce case.