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Rombro & Manley LLP

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Valuing a business in a California divorce

On Behalf of | Aug 3, 2020 | Business Divorce

One of the most vexing problems in a California divorce is dividing a business owned and operated exclusively by the divorcing couple. California’s community property law requires that the net value of such assets be divided equally between the divorcing spouses, but how can that division be achieved when the couple owns all of the business’s outstanding stock? The easiest method is the joint agreement of the co-owners, but that outcome is not always possible, especially if a third party has an interest in the business.

Perhaps the best solution – and perhaps the only solution – is to hire a professional appraiser to fix the value of the business. That number can then be used by the court to divide the asset.

Hiring an appraiser

Most reputable appraisers have been certified by several professional organizations. Many appraisal firms hire only CPAs for business valuation. These appraisers may also be certified by the American Society of Appraisers and the National Association of Certified Valuators and Analysts.

Finally, business appraisers must meet the requirements of the Internal Revenue Service, Small Business Administration and the Uniform Standards of Professional Appraisal Practice. Different appraisals have different uses. A limited or ballpark appraisal is normally limited to internal use. For a divorce, the appraiser is usually asked to prepare the appraisal in a Full Detailed Report.

The valuation process

The valuation begins with the gathering of information about the size and operations of the business. Most appraisers will ask for 3 to 5 years of business information, including tax returns. The business owner will also be asked to fill out a questionnaire that provides additional information deemed by the appraiser to be relevant. The appraiser will then use one of three methods to calculate the value of the business:

  • Net value of the business’s assets
  • The income that the company is likely to earn
  • The prices that have been paid for similar businesses

The appraiser will then prepare a final bound report that is given to the client. In a divorce appraisal, the report will ordinarily be given to all owners of the business and to both parties in the divorce.

A capable divorce attorney is usually necessary to supervise the preparation of the appraisal report and the presentation of the report to the court. While appraisal fees may seem expensive, they usually represent significant savings over the cost of fighting about value without an expert report.