How to Value a Business in a Divorce

Property division is one of the most complex and potentially contentious issues in any divorce. Especially in high-asset divorces, the division of the marital estate can require extensive property valuations, forensic accounting, and negotiations between both parties. One asset that can cause property division to become even thornier than normal is when one or both parties own a business. While the default rules for property division under California’s community property laws are fairly straightforward (i.e., 50/50), figuring out how much a business is actually worth is anything but and may require the assistance of a Stockton divorce lawyer.  

Things to Keep in Mind When a Business Is on the Table

Valuing and dividing a business is different from valuing and dividing other assets. As such, there are a few things you should keep in mind before beginning the process: 

• Separate vs. community property: The business may not be entirely separate property or entirely community property. For example, if one spouse started the business before the marriage, a portion of it may be considered separate property. 
• Division can put the business in jeopardy: A 50% reduction in a business’ value may spell the end of its ability to stay afloat and compromise the remaining spouse’s income and, by extension, ability to pay alimony and/or child support. 
• Hidden assets: Business owners may use accounting tricks and other underhanded techniques to obscure the business’ true value, possibly requiring the use of a forensic accounted
• Numerous professionals will be required: In addition to a divorce attorney, other professionals who might be involved in the valuation of a business include accountants, realtors, and intellectual property attorneys. 

Methods of Valuing a Business

Below is a general overview of three common methods of valuing a business. 

The Asset Approach 

The asset approach calculates the value of a business by subtracting its liabilities from its assets. After the assets are evaluated to determine their “book” value, a fair market value is obtained. This type of valuation method may not effectively capture all assets, however, such as “intangible” assets like customer goodwill and intellectual property. 

The Income Approach 

The income approach calculates the value of a business by calculating the present value of the business’ future earnings or cash flow. There are several ways to do this, but they generally involve using the business’ past performance to estimate its future performance. The expected future earnings are then adjusted to take into account changes in growth rates, taxes, and other issues. 

The Market Approach 

The market approach calculates the value of a business by comparing it to other businesses that have sold recently. While that sounds simple in theory, it is not always so simple in practice. For example, depending on how unique the business is, it may be difficult to find similar business in the same industry making similar earnings in the same geographic area. 

Get Help Valuing Your Business From a Stockton Divorce Lawyer

For more information about valuing and diving business in divorce, please contact a Stockton divorce lawyer at McKinley, Conger, Jolley & Galarneau by using our online form or calling us at 209-477-8171.