When one or both spouses own a business or professional practice, determining its value can become one of the most complicated parts of a California divorce. A business may include tangible property, accounts receivable, debts, and value that cannot be identified simply by looking at a bank balance. If some or all of the business is community property, the family court may need to determine its value before the community estate can be divided.

Why Business Valuation Can Be Complicated

Small businesses and professional practices can be particularly difficult to value because there may be no simple market price available. Unlike a publicly traded stock, a privately owned company may not have a readily identifiable value on any particular day.

Instead, a business valuation may require examination of several components. These can include accounts receivable, fixed assets, liabilities, earnings, and goodwill. The importance of each component depends on the particular business.

Accounts receivable are one example. A business may show a substantial amount of money owed by customers or clients, but not every receivable will necessarily be collected. A valuation may therefore consider the age and collectability of those accounts rather than simply treating every dollar owed to the business as having full value.

Because these questions can require specialized financial analysis, California divorce cases involving businesses frequently use expert assistance. A forensic accountant may be retained to analyze financial information and provide an opinion concerning value.

What Is Business Goodwill?

Goodwill can be one of the more difficult concepts to understand in California property division. In general terms, goodwill represents the expectation that an established business will continue to attract customers or clients because of advantages the business has developed over time.

Goodwill can have value even though it is not a physical asset. A professional practice, for example, may have an established reputation, client base, location, or other characteristics that contribute to its ability to generate future business.

California does not use one rigid formula to determine goodwill in every case. The appropriate analysis depends on the particular facts, and financial experts may use recognized valuation approaches to estimate the value.

There are also limits on what may be included. Business goodwill should not be valued in a way that improperly captures the operating spouse’s postseparation efforts. California also distinguishes the goodwill of an actual business or professional practice from the personal career value of an individual. A person’s talent or professional reputation alone is not necessarily a divisible goodwill asset apart from a business.

What If the Business Existed Before the Marriage?

A business owned before marriage may begin as one spouse’s separate property, but that does not always end the California property division analysis.

If the business increases in value during marriage and a spouse’s labor, skill, or management contributed to that growth, the community may have an interest in part of the increase. California courts use established methods to allocate value between the spouse’s separate property investment and the community’s interest in marital efforts.

The appropriate method can depend on what primarily caused the growth. In one situation, the spouse’s work and management may have been the main reason the business increased in value. In another, the growth may have resulted primarily from the underlying investment, market conditions, employees, or other factors.

Determining the appropriate allocation can require detailed financial records and expert analysis. The valuation date may also matter, particularly when a business continues to operate and change in value after separation.

A Business Is More Than Its Bank Balance

Valuing a business in a California divorce may require examining assets, liabilities, receivables, earnings, goodwill, and the history of the business during the marriage. When a business existed before marriage, the court may also need to determine how much of its growth is separate property and how much is attributable to the marital community. Because these issues can significantly affect California property division, a careful financial valuation is often necessary before the business can be fairly addressed in the divorce.