When a couple decides to get divorced, one of the things they need to figure out is how to divide their assets. In California, assets acquired during the marriage are considered community property and may be divided equally between spouses. A business the couple owns may be subject to property division laws. In some cases, divorce can put the company at risk. This blog post will discuss how a business is valued in a California divorce and split between spouses.
What Happens to a Business in a Divorce?
A business is treated like any other asset in a California divorce. That means it may be divided equally between the couple.
Before the business is split, it must be evaluated. The evaluation facilitates fairness in the outcome of the divorce.
What Approaches Are Used for Business Valuation?
Businesses are often a significant asset in a California divorce. The value of the business may be determined by several factors, including the business's financial statements, the goodwill of the business, and the contribution of each spouse to the company.
Businesses may be valued using a variety of methods, including the following:
- Asset approach: With this method, the business liabilities are subtracted from the total assets.
- Market approach: This method involves comparing similarly sized businesses in the same industry with the couple’s business. The accuracy of the valuation depends on several factors.
- Income approach: The business is valued based on the estimated net income and past performance.
Each method has its own strengths and weaknesses. The choice of approach may significantly impact the value assigned to the business.
What Other Factors Can Impact the Business Valuation?
A range of factors can affect the business valuation.
Below are some of the variables:
- The size of the business: Generally, larger businesses will generally be valued at a higher amount than smaller businesses. Larger companies tend to have more assets and generate more revenue than smaller businesses.
- The industry sector: Certain sectors, such as healthcare and technology, tend to be valued at a higher amount than others due to the high level of growth potential in these industries.
- The level of profitability: Highly profitable businesses will typically be valued higher than those that are not as profitable. More profitable companies tend to have more cash flow and are therefore seen as more valuable.
- The level of debt: Businesses with high levels of debt will generally be valued at a lower amount than those with less debt because they can be seen as less financially stable and, therefore, less valuable.
- The age of the business: Older businesses tend to be valued at a lower amount than newer businesses because they typically have less growth potential and are seen as less valuable.
- The growth potential of the business: Businesses with high growth potential will generally be valued at a higher amount than those without this potential. High-growth potential businesses are seen as more valuable because they could generate more revenue in the future.
Who Conducts a Business Valuation?
Evaluating a business is no small task. Various factors must be considered to determine an accurate value. Therefore, a professional, such as a forensic accountant, should conduct the valuation.
The spouses can jointly hire a forensic accountant, or they could each retain their own. In either case, once the value is calculated and agreed on, the business will be split accordingly. However, if the spouses cannot agree, they may have to have the court decide how to distribute the company.
How Can You Protect Your Business During a Divorce?
One of the ways you can protect your business should your marriage end in divorce is by creating a marital agreement setting provisions for the company. If you are not married yet, you and your future spouse may develop a prenuptial agreement that discusses how, or if, the business will be split. Alternatively, if you are already married, you may consider a postnuptial agreement, which is like a prenup but differs in when it was created.
Schedule a Consultation with Our Firm
A business is a large asset in a divorce, and ensuring that it is divided fairly is essential for both spouses. By hiring a family law attorney for your case, you can rest assured knowing that you have an advocate working to protect your best interests. Your lawyer can discuss the steps in evaluating and dividing the business and other options you might have to keep the company intact. They can also consult with experts to evaluate your business accurately.
To speak with one of our San Diego lawyers at Claery & Hammond, LLP, please contact us at (619) 567-6704 today.