If you’re going through a divorce, and you and your spouse own the business together, you may find it necessary to talk to an Upland business valuation lawyer as early as possible in the process. Dividing the business’s assets and debts can be tricky during divorce, so it’s important that you work with the right team of professionals to ensure an equitable distribution of property.
Any divorcing couple that owns a business together needs an accurate business valuation. The state of California recognizes two types of property – community and separate – and because your business is likely community property, the courts will need to know its exact value in order to ensure equitable distribution of your marital assets and debts.
Professionals use a variety of methods to value businesses in the state of California. Some of the most common methods include the comparable transactions method, the multiples method, the market valuation method and a discounted cash flow analysis method.
One of the most common ways to value business is the comparable transactions method. Evaluators look for past market transactions that contain businesses similar to yours.
However, one difficulty associated with this method is finding similar businesses. Market conditions change frequently, so it can be tough to compare your current business with something that has recently sold.
In the multiples method, evaluators will get several factors, including:
Sometimes the market valuation method is considered one of the most reliable ways to value business. This method relies on actual market transactions to determine how much a business is worth. It’s also very common for a valuators to use this method – partly because it is so reliable.
Using projected future cash flows for business allows evaluators to use the discounted cash flow analysis method to value business. If valuators adjust the amount of money they believe the business will generate in the future and then convert those future earnings to today’s market value.
It can be difficult to determine future cash flow for any business. Evaluators must consider sales growth and future profit margins, and a lot of that information is speculative.
During a divorce, community property must be divided fairly. That includes assets and debts. Whether a business is profiting or losing money, each spouse is responsible for his or her portion of the business.
Things can get tricky when one spouse owned the business prior to the marriage and the other spouse joined the business after the marriage. That’s why it’s so important that you work with a business valuation lawyer who understands California law and how it applies in your case.
Under California law, property is considered community when it is acquired during the marriage. There are a few exceptions to this rule, such as inheritances and gifts, but typically, everything that a couple earns or builds together (such as a business) is considered community property.
The term separate property refers to assets and debts that belonged to each individual prior to the marriage.
Valuing a business is similar to putting together a difficult puzzle. It typically requires extensive investigation, which can be particularly complicated when there is more than just a business to consider, including:
Typically, to accurately value a business, you need to work with a team of professionals that can include accountants, business evaluators and other experts.
If you and your spouse own a business together and you are contemplating divorce, it may be a good idea to consult with an Upland business valuation lawyer as early as possible in the process.