California is a community property state. According to the law, all of a divorcing couple’s assets are divided so each receives equal value, unless the parties agree otherwise. If one spouse wishes to maintain ownership of a business or practice, that person might have the option to buy out the other spouse. When dividing a family business or professional practice, determining the value of the business can be complex.
How a court values a business
When assessing a business for sale or division, there are several issues to examine. An appraiser values a business based on how much a non-interested party would pay for the business on the date of separation and in the current economic climate. The appraiser also considers the value of fixed assets, such as real estate, furnishings, equipment, cash and vehicles, and other assets, including accounts receivable, work in progress which has not yet been billed and goodwill. A court is at liberty to consider any valuation as long as it is based on reasonable evidence.
How does an appraiser value goodwill?
Some partnership agreements state that goodwill is not an asset subject to division. If the partners do not have an agreement regarding goodwill, this might become an area of contention. As defined in the California Business and Professional Code, goodwill only belongs to the owner of the business. The concept is that the value of the business partly relies on the continued patronage of the community. The business has value because it serves a purpose for its clientele, and the business’ degree of success depends on the owners’ effort, reputation and relationships with patrons.
If the business is considered community property, then both owners also own a share of goodwill. As a general rule, an appraiser can value the goodwill of a business by comparing it with a business of a similar nature. This is known as the excess earnings method.
If the business has any debt, this is also divided between the partners. If the economic downturn has affected the business, this might be taken into account when assessing the market value. However, there is currently no rule, trend or precedent regarding the effect of the economy on the valuation of a business.