Business Valuation Methods In California 101
So you have come to the point where divorce is inevitable. Many couples come to this point, but some lucky few have to deal with the added complication of valuing and dividing their business as an asset.
Many are familiar with the concept that California is a community property state. What this works out to is that in the majority of divorce cases when one or both of the spouses own a business then their spouse is entitled to a portion of the value of the business, or to retain a stake in the business moving forward. (This is, of course, negated in many instances if there is a valid prenuptial agreement or valid postnuptial agreement in effect whose terms vacate this interest).
Every case is different, and given the importance of ensuring that your business and livelihood remain as unaffected by the divorce as possible, it is critical to engage with experienced property-division attorneys when dividing business interests/assets. This article aims to introduce readers to some of the valuation methods and variables they may encounter as they proceed with a divorce that involves division of business interests. While this should not be considered a comprehensive or definitive guide on the topic, this is a good starting point to begin investigating the valuation process of business in a divorce case.
What is a Business Valuation?
A business valuation is much like the valuation of any asset or property – it is the process of evaluating a business and determining the value of the business. This may be done in the course of a divorce in order to enable the fair or rightful division of interest in the property between the divorcing spouses. Our article titled “Business Valuations in Divorce” discusses this topic in greater detail.
If you are in a place where you understand that your divorce will involve some division of your business interests with your ex-spouse, you will likely be keenly interested in understanding how, precisely, the value of your company will be determined.
Like so much in the law, the answer is – it depends.
Business Valuation Methods
Every couple is different, every divorce is different, and every business/business interest is different. Reflecting this, there is no “one way” that a business is valuated. In California, a number of methods and tools might be utilized to help determine the value of a business and enable the fair/equitable division of the asset/interest. Some of these methods and tools include:
- Income approach,
- Capitalized earnings
- Discounted Cash Flows,
- Market approach
Income Approach, Capitalized Earnings, and Discounted Cash Flows
The income approach is commonly used to value businesses in California. This method involves using the business’s past history and performance trajectory in order to predict future profits and cash flow in order to determine a value to be used for the purposes of interest division.
The estimated future income of the company is used to determine its current value. This tool/method is generally used to value stable companies with high earnings.
The method/tool of utilizing discounted cash flows will often be used in the cases of businesses that do not have a stable valuation history. Past performance is, once again, utilized as a tool to predict the business’s future success. This method deducts the owner’s salary from the business cash flow, which means that the remaining amount is used to calculate future value.
Market Approach
This approach attempts to value a business by investigating what similar businesses have been sold for. This is a method that should be used with caution, as it is not appropriate in every situation. The California courts have decided, for instance, that a publicly-traded company is not to be considered similar to a private/non-public company. If a public company is compared to a private company, or vice versa, for the sake of this valuation method then the court will deem the valuation invalid.
As previously noted, not every valuation method is appropriate for every situation. It is critically important that you engage with experienced legal and financial professionals in order to ensure that your interests are best served through the property-division and divorce process.
Speak with Cardwell, Steigerwald Young About Your Divorce and Business
Most high-asset divorces are long, complicated, and require nuanced skill to successfully maneuver. The experienced San Francisco property division lawyers at Cardwell, Steigerwald Young have helped many clients navigate through the complexities of their high-asset divorce. Allow us to help you move forward in this process with confidence – contact our office today to discuss your case.
Sources:
In re Marriage of Hewitson, 142 Cal.App.3d 874 | Casetext Search + Citator
businessinsider.com/how-to-protect-money-divorce-2017-1
