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How Is Business Ownership Valuation Divided in a Carlsbad Divorce?

On Behalf of | May 13, 2019 | Professional Practice & Business Ownership

How is business ownership valuation divided in a Carlsbad divorce?  How do you establish and then ultimately divide the community property interest in a business or professional practice in a North County or Carlsbad divorce case?  In these cases, a “valuation” of the business or professional practice ownership must first be agreed upon or established by the Court.  Once the valuation is established, the community’s interest in the business or professional practice is divided (as all other assets of the couple) according to California law.

One of the first issues to be addressed relates to the timing of the formation or acquisition of the business interest as it relates to the marriage of the parties.  If the business interest was obtained prior to the marriage, the community property valuation is usually based upon the increase in the value of that business ownership interest during the course of the marriage.  This issue becomes even more complicated if marital funds were used to directly invest in that business.

One of the keys in the equation of how a business ownership valuation divided in a Carlsbad divorce lies in when it was formed or acquired.  If the business ownership interest was obtained during the course of the marriage, and is primarily held or operated by one of the parties the present value of that business must be established, and the community property interest in that business must be divided.  If one party intends to retain ownership, the spouse who owns the business is usually required to compensate the non-ownership party for that party’s half of the community property value of the business interest.

In the event the business was started or obtained during the course of the marriage and shared by the both spouse’s, the valuation and ultimate disposition of a business can be quite challenging. Will both parties continue to operate the business?  Will one party buy the other one out?  Is it best to simply sell the business and divide the proceeds?

There are two primary strategies for determining the “valuation” of one spouse’s business interest – a “calculated multiplier” and a full valuation by external experts.  The “calculated multiplier” method basically multiplies the annual revenue of the business by an industry standard factor or “multiplier.”  For example, if the appropriate multiplier for the nature of the business is 4.5 and the annual revenue of the business is $1 Million the value of the business could be estimated to be $4.5 Million ($1,000,000 x 4.5).

In most cases, a full valuation must be established through the expert testimony of external witnesses.  Establishing the valuation of any business ownership interest or professional practice includes many factors such as the market value of “what a willing buyer would pay to a willing seller if there is no compulsion on either party to conclude the transaction.”  It must also consider “goodwill” or the “probability that the business will continue in the future as in the past, adding to the profits of the concern and contributing to the means of meeting its engagements as they come in.”  This must be taken into consideration before working on how is the  business ownership valuation divided in a Carlsbad divorce.

The experienced Carlsbad divorce attorneys at Burke & Domercq have decades of expertise in these matters.  If you are involved in a Carlsbad divorce and either of the parties owns an interest in a professional practice or business both parties should be represented by their own attorney.  We invite you contact us or call 760-389-3927 to schedule an appointment with one of our attorneys.