A business interest can be one of the most complicated assets to divide in a California divorce. Unlike a bank account with a readily identifiable balance, a privately owned business or professional practice may have no public market price. Determining its value can require analysis of earnings, tangible assets, ownership interests, goodwill, and the particular characteristics of the business. When a community property interest exists, the family court must determine an appropriate value before the property division can be completed.

Closely Held Businesses May Not Have an Obvious Market Value

A closely held corporation generally has relatively few shareholders and shares that are not publicly traded. Because there may be no active market for those shares, determining what the ownership interest is worth can be difficult.

California does not require one universal appraisal method for valuing an interest in a closely held corporation.

Depending on the circumstances, valuation may consider market value or investment value. An expert may analyze the company’s financial condition, earning capacity, assets, liabilities, history, and other factors relevant to determining the value of the ownership interest.

The family court is not required to accept a valuation simply because an expert presents it. The methodology and assumptions underlying the opinion matter.

A business valuation can therefore become a significant disputed issue when one spouse operates the company and the other spouse claims a community interest in it.

Goodwill Can Be Part of the Business Value

Some businesses and professional practices have value beyond their equipment, accounts, inventory, and other tangible property.

That additional value may include goodwill. In general terms, business goodwill reflects an expectation of continued patronage—the competitive advantage developed by a business that is expected to attract customers in the future.

There is no rigid formula that must be used to determine whether goodwill exists or what it is worth. The appropriate analysis depends on the facts of the particular business.

Experts may use recognized valuation approaches, including methods based on excess earnings. Under an excess-earnings approach, the analysis can consider business earnings, a reasonable return on tangible assets, reasonable compensation for the working spouse, and a capitalization of earnings attributable to goodwill.

The earnings analysis should use a period reasonably representative of the business rather than relying improperly on a single year.

There are also important limits. Goodwill cannot be valued using a method that includes the operating spouse’s post-separation efforts. California also distinguishes goodwill belonging to an actual business or professional practice from the personal reputation or future career opportunities of an individual.

The Valuation Date Can Significantly Affect the Result

California property is ordinarily valued as near as practicable to the time of trial, but the family court can select an alternate valuation date when appropriate.

Business interests can present an important exception.

When the value of a small business depends largely on one spouse’s personal skill, work, guidance, or reputation, using the separation date may be appropriate. This prevents the community from receiving value attributable to the operating spouse’s separate post-separation efforts.

An alternate valuation date can also be appropriate when a party’s deliberate or reckless failure to maintain adequate records prevents a reliable valuation at trial.

The date selected can make a substantial financial difference when a business grows or declines significantly after separation. If the business is valued as of separation, the community generally shares in the value existing at that point, while later increases or decreases attributable to the operating spouse may be treated differently.

Business Valuation Requires More Than Looking at Revenue

Valuing a business in a California divorce can require analysis of assets, liabilities, earnings, ownership interests, goodwill, and the appropriate valuation date. Closely held businesses are particularly challenging because there may be no public market establishing an obvious price. When the business depends heavily on one spouse’s work, separating community value from post-separation efforts can become an important part of achieving an accurate California property division.