Dividing a Business

[DIGITAL TRANSCRIPT of recent article in “San Diego Discover Magazines”]

Sarah T. Schaffer, is a Certified Family Law Specialist with offices in Del Mar and Carlsbad. Her firm, Schaffer Family Law Group, provides a full-range of family law services including divorce, property division, custody, support and mediation. For more information, Call Sarah at 858.509.7907 or go to www.sandiegofamilyattorneys.com.

In a divorce, any business entity, regardless of which spouse owns or operates it, must be considered. As part of any dissolution of marriage, the court is required to equitably divide all real and personal property. When there is a business, the Court will assign some determined value to the business in order to make an equitable division of the marital estate. This is usually done at trial, although divorces are more commonly resolved before trial. Ideally, the parties will work together, with an appraiser if necessary, to determine the value of the business. If they can reach an agreed-upon value, they will assign that value accordingly to divide the marital estate.

Not all businesses have marital value, especially smaller businesses whose primary value is from the efforts of one spouse. For example, a small law practice, owned by one spouse who is an attorney, may own minimal office equipment, but primarily generates income based on the attorney spouse’s efforts. In a divorce, such a business would probably have little value to be divided because marital value is determined separately from a spouse’s efforts. In other words, without the attorney spouse’s efforts, the business itself would not be valuable.

On the other hand, some businesses may have substantial value based on goodwill. For example, a multi-office dental practice of software development company, owned and operated by both spouses or one spouse, has value that can be maintained even if one spouse no longer participates in the business. In that case, a court may assign the value of the practice to the spouse who primarily operated the practice because that spouse can continue the business’s value after divorce.

Marital value of a business, which is what’s evaluated in divorce, is different than fair market value. Marital value is based on many factors. A business appraisal for marital value can be completed by income, market method, asset-based or a hybrid approach.

(1) – The income method determines future benefits to the business owners by applying discount and capitalization rates to the net cash earned by the business.
(2) – The market method determines valuation through comparable sales of similar businesses.
(3) – The asset method, often used for smaller businesses, determines value by calculating the book value of the assets in the business at the date of separation.

In family law litigation, parties often hire a joint appraiser to determine the value of the business.

It should not be surprising that the value of a community property business is divided evenly between the parties. However, it may be surprising that the community may also be entitled to a portion of the value of a separate property business, in other words, a business that existed prior to marriage. A business valuation in divorce may also be affected by the presence of a premarital or postmarital agreement.

Clearly, the valuation of a business during a dissolution of marriage is complex. If you own a business and are facing the prospect of divorce, it’s imperative to have an attorney who is well versed in business valuation methodology to assist through the process.