In California’s community property system, spouses hold all property and debt that accrues during the marriage equally. Upon dissolution of the marriage, this community property is split 50/50. The court’s task is to rule on the value of these assets and debts to divide them equally, but there lies the rub.
How to proceed?
Not all assets and liabilities are easily measured. Business valuations, being part art and part science, are especially tricky. Here are some of the methods available for determining the economic value of a business:
- Market capitalization: This is a simple approach, more likely to be used in high-asset divorces. The company’s share price is multiplied by the total number of outstanding shares and the product is the company’s value.
- Times revenue business valuation method: Here a revenue stream generated over a period of time is applied to a multiplier which varies with the industry the company is in. The product is the company’s assessed value.
- Earnings multiplier: This method zeroes in on profits rather than sales revenue to accurately understand the company’s value. It adjusts the current P/E ratio for current interest rates.
- Discounted cash flow method: This is very similar to the earning multiplier method, but it takes inflation into account to arrive at the company’s current valuation.
- Book value: Here we go to the company’s balance sheet statement. The company’s total assets minus its total liabilities equal its book value.
- Liquidation value: If the company was sold today, what would the result be? This is another suggested value of the company.
None of these approaches are conclusive, and it must be noted they yield different results. Further, there are other methods to consider like replacement value, breakup value, asset-based valuation, and more after that. Valuation is an expensive process but an important investigation. Only with a close approximation of the business’s value can the next steps be taken and an equitable settlement achieved.