In matters involving the division of assets upon divorce, dividing a business can be a complicated issue. To preserve one’s business interests during the divorce process, one must determine the proper dollar valuation of the company.
Calculating the value of a business can be understood similarly to determining the value of other major assets, such as real estate and public stocks. Fundamentally, the task of assessing the value of these assets can be accomplished using the following approaches:
- Market valuations: The value of a business can be derived from comparing a particular enterprise to businesses that are similarly situated and listed on the open market. Essentially, the value of a business is based on the going value of a comparable business sold on the market.
- Asset valuations: The value of a company can be determined by calculating the difference between its assets and liabilities. This is similar to the “cost approach” for real estate appraisals.
- Income valuations: The income streams of a business can be used to determine its overall value. This is a sophisticated valuation approach that derives the company’s value by determining the present value of a business based on future cash flows.
Different valuation methods yield different results. Moreover, the valuation of a business can vary depending on the date of the valuation.
When to Start a Valuation
In general, the valuation of a business is restricted to a specific date or range of dates for purposes of dividing the community assets of the divorcing couple. Courts look at the date that a party’s interest in the business was acquired when characterizing it as either a divisible community asset or non-divisible separate property. If a business was founded or acquired after the parties were married and before they separated, it is most likely to be considered a community property business subject to equal division upon divorce.
California Family Code § 2550 provides that community assets retain their community character until it is divided by the court or the parties per a settlement agreement. As a result, community business interests are still considered community property after separation and before trial, despite the valuation date.
Alternate Valuation Dates
Under California Family Code § 2552, courts are required to assess the value of community property and assets as close to the date of the trial as practicable. This ensure that the court restricts property division based on the date each party would be entitled to the property. However, that section also details the procedure that allows a party to rely on a different valuation date.
California Family Code § 2552(b) provides that a party requesting an alternate valuation date for their business must provide 30 days’ notice to the opposing party, supported by facts showing good cause to use a valuation date before the trial date and after the date of the parties’ final separation.
When determining whether there is “good cause” to use a different valuation date, California courts consider factors such as:
- A party’s obstructive conduct
- The dissipation of community property after separation
- Individual post-separation acts that increased the community estate’s value
- The waste of community property
- A party’s breach of their fiduciary duty to the community
- Uncertainty resulting from the post-separation commingling of community and separate funds
- Principles of equity and justice require the use of an alternate valuation date
Apportionment Methods
Under traditional apportionment, if one spouse runs a separate property business during their marriage, increases in its value which naturally result from market conditions at the time will be treated as the spouse’s separate property.
However, if the value of the business increased during their marriage as a result of a spouse’s community efforts, the court will apportion the increased value between the community and separate estate, to the extent each estate contributed to such an increase. The relevant increase in value is restricted to a range between the parties’ date of marriage and the date of trial.
According to reverse apportionment, increases in the value of a community property business that primarily result from a spouse’s efforts after the date of separation will be apportioned between community investment contributions and the spouse’s post-separation efforts. In such cases, courts apportion the business close to the date of the parties’ separation.
