Valuing a Family Run Business in Divorce

Determining the value of a family run business while going through divorce can be one of the more difficult tasks to deal with in Family Court. Typically only one spouse has been managing the business during the marriage. However, now that the spouses are parting ways, suspicion and mistrust arise. The spouse who has not been managing the business now thinks the managing spouse will siphon off funds from the business's bank accounts, hide income, and do what he/she can to devalue the business, so he/she can buy out the non-managing spouse's community interest at a steal. Meanwhile, the managing spouse thinks the non-managing spouse is going to overvalue the business, so he/she has to pay through the nose to buy out the non-managing spouse's share. The managing spouse feels like he/she is being accused of all sorts of wrongdoings, when all he or she is trying to do is keep the business afloat. Regardless, here are some general issues that arise when it comes to valuing and dividing a family run business:

1. Date of valuation of the business. Usually, the business is valued as close to the date of trial (or settlement) as possible, as per Family Code Section 2552(a). However, as explained below, there may be reasons to value the business at an earlier date, such as the date of separation. (There could be quite a span of time between date of separation and the date of trial, for a variety of reasons). If a spouse wishes this to be done, he or she needs to file a motion with the court, pursuant to Family Code Section 2552(b), requesting an alternate valuation date.

2. Is the business community property, or separate property? Generally, community property is acquired during the marriage, by one of the spouses, through earnings and/or work efforts. Community property is equally owned by both spouses. On the other hand, separate property is acquired by one of the spouses prior to marriage, after the date of separation, or at any time through gift, devise, or inheritance. It belongs 100% to the spouse who acquired it.

However, a business can contain both a community interest and a separate property interest. For example, a business is started during the marriage, and as of the date of separation, the business is 100% community property. However, the Court doesn't address the valuation and division of the business for 1 or 2 years after the spouses separate. During this period of time, the managing spouse has been contributing his or her work efforts to keep the business running. In so doing, he/she has been building up a separate property interest in what was a wholly community property business as of the date of separation. So, now the Court has to determine the value of the separate property interest in the business. In ascertaining the value of the separate property interest in the business, there are sometimes disputes as to the role the managing spouse played in managing the business. Was the managing spouse an integral part of the business? Would the business have failed but for his/her efforts? Or, is he or she simply a cog in the machine? Could anyone have done his or her job? Depending on the answers to these questions, the separate property interest of the managing spouse could be lesser or greater.

Sometimes to avoid this issue of valuing the separate property interest in the business, the Court may entertain a spouse's motion to value the business as of the date of separation.

3. How much is the business worth? Assuming the business's books are kept current, it's easy to prepare a balance sheet for the business. The balance sheet will list all of the business's hard assets and liabilities. The difference between the two will determine the business's equity. However, what is excluded from a balance sheet is the business's goodwill. Goodwill is an intangible asset that is not easy to value. Therefore, typically, in family law cases, forensic accountants are consulted to ascertain the value of a business, including its goodwill. When, as discussed above, there's both a community and separate property interest in the business, a forensic accountant can offer opinions as to the value of each portion of the business.

As stated, these are the general issues in regards to valuing a family run business in a divorce. Should you have a family run business, and are contemplating divorce or legal separation, we, at the Law Offices of Evan Samuelson, are here to help you.