Business Ownership & Business Valuation in a Marital Dissolution 

Where one or both spouses enjoy an interest in a business or professional practice, that interest will need to be valued. Different valuation methods are employed for businesses that are wholly or partially owned by the parties, and for those which are closely held.

In assessing the value of that business or practice that is wholly owned by the parties, the court will consider the business’ fixed assets, other non-fixed assets (such as accounts receivable), goodwill (if any), and liabilities. (See generally Marriage of Lopez (1974) 38 CA3d 93, 110.) “Goodwill” refers to the ongoing value of a business from continued public patronage and is often included where valuation of a professional practice (e.g. a law firm) is concerned. (See e.g. Marriage of Watts (1985) 171 CA3d 366, 370). It is common practice for each party to retain a forensic accountant who will opine as to these components of value. Alternatively, the court may appoint its own expert pursuant to California Evidence Code §730 where valuation of the business is at issue. Accountants (or other valuation experts) employ a number of methods, such as a market approach, cost approach, or income approach for determining the value of a business.

With respect to business interests held jointly with other persons, such as partnership interests, the value of the parties’ interest may be defined by agreement. By way of example, the formation documents of a partnership, or a buy-sell agreement, may provide credible evidence of the value of the business interest. (See generally Marriage of Fonstein (1976) 17 C3d 738, 745-746). In assessing whether the terms set forth in a buy-sell agreement should be used in setting the value of the business interests in a dissolution, the court should consider the proximity of the date of the agreement to the date of dissolution, whether the value produced by the buy-sell agreement is similar to the value produced by other approaches, and any other reasons why the parties may have entered into the buy-sell agreement. (See generally Marriage of Nichols (1994) 27 CA4th 661.) Where the value of the business is disputed by the parties, it is common practice for each party to retain a forensic accountant.

A “closely held” corporation is one which has few shareholders and is not traded by the public. To assess the value of the parties’ interest in a closely held corporation, the court must attribute either a ‘hypothetical market value’ or an ‘investment value’. (Marriage of Hewitson (1983) 142 CA3d 874, 882.) A hypothetical market value is determined based on comparable recent sales of the unlisted stock in that corporation or upon a price-earnings ratio approach. The investment value of closely held shares is determined either by capitalization of earnings, capitalization of dividends, or by book value. Independently retained accountants will render opinions as to which approach is most equitable and appropriate for the circumstances of the case.

Where one party owned a business interest prior to marriage and that interest increased in value during marriage as the result of either party’s efforts, the court may apply the approaches of Van Camp v. Van Camp (1921) 53 Cal.App.17 or Pereira v. Pereira (1909) 156 Cal.1 to apportion the increase value between the parties and determine the separate property and community property components of the business’ value.

Business interest(s) of the parties will ordinarily be valued as near as practicable to the time of trial. (California Family Code §2552(a).) For good cause shown, the court may value business interest(s) at a time before the date of trial, including, by way of example, where one party’s lone hard work increased the value of the business post-separation.

Call 949-644-4007 today to learn more about our experience working with business valuators within the context of divorce. Our divorce lawyers assist business owners throughout Orange County, including Newport Beach and Huntington Beach.