How is a Privately-Held Business Valued in a California Divorce?

If you own a private practice or other privately-held business, understanding what can happen to your business will be a critical step toward preparing for your divorce. For purposes of this article, we are assuming that the business is properly characterized as community property and is not covered by a prenuptial agreement. If your business qualifies as separate property, or if you entered into a prenup that protects your business, it is a very different factor in your divorce.

Like all community property assets, in California, private practices and privately-held businesses are subject to division in a divorce. Now, there are options for protecting individual assets – including businesses – but the starting point for assessing those options is to understand exactly how big of a role the business is going to play in the overall division of property. This requires a valuation.

California Divorce Law: Valuation of a Privately-Held Business

The California courts consider a number of different factors when determining the value placed on a privately-held business in the context of a divorce. In most cases, you will need to have your business privately appraised; and, whether you settle your divorce out of court or end up going to trial, you will need to put forth a valuation that is capable of withstanding judicial scrutiny.

Four of the primary factors the California courts consider in assessing divorce-related business valuations are:

The value of the business’s fixed assets
The value of the business’s accounts receivable and other intangible assets
The business’s goodwill
The business’s outstanding debts and liabilities

In addition, California case law instructs the courts, in most cases, to accord due weight to the following factors outlined in IRS Revenue Ruling 59-60:

The nature of the business and its history from its inception
The economic outlook in general, and the condition and outlook of the industry in which the business operates
The business’s financial condition and book value
The business’s earning capacity
The business’s dividend-paying capacity (if applicable)
Any intangible value in addition to goodwill
Prior sales of ownership interests (if any)
The market price of the stock of publicly-traded companies in the same or a similar line of business (if applicable)

Note that no one factor, such as the business’s book value, is determinative when it comes to valuing a business in a California divorce. Instead, the goal is to arrive at a supportable “fair market value” – the same measure of value applied to all other community property assets during the property distribution process.

Schedule a Case Evaluation with San Diego & North County Divorce Attorney Richard Renkin

With nearly three decades of experience, North County divorce attorney and Certified Family Law Specialist Richard M. Renkin offers a wealth of knowledge and deep insights for business owners contemplating divorce. If you would like more information on how private practices and privately-held businesses are valued during California divorces, or what steps you can take to protect your business from your spouse, please call 619-299-7100 or contact our firm online to schedule an appointment today.