When a divorcing California couple turns to valuing their assets, one of the most difficult issues is the value of a jointly owned business. Many couples start small businesses early in their marriage and devote significant energy to making the business a success. Whether the success is modest or significant, the value of the company can add significant stress to settling property division issues, especially if the couple is looking at a high-asset divorce. One of the most efficient ways of determining the value of a business is to hire an experienced business appraiser.
Many people wonder why an appraiser is necessary in a community property state. After all, isn’t the business divided equally between the spouses? The answer in theory is “yes,” but businesses often cannot be neatly sliced in half. Some businesses must be sold, either to a third party or to the other spouse. In such transactions, both parties will want to know whether the price is fair.
As with any type of appraisal, the purpose of a business appraisal is to determine how much a willing seller will accept from a willing buyer. Business appraisers are trained to use one of three approaches to valuing a business. The first is the asset approach, where the appraiser measures the value of the company’s assets and subtracts outstanding debts to determine the company’s fair market value. A second approach is the income approach, in which the appraiser measures the company’s operating income over a period of years and then uses assumptions about interest rates and other economic conditions to calculate the company’s present market value. The final approach to value is the market approach, in which the appraiser finds sales of comparable businesses and derives a fair market value based upon the values used in these comparable transactions.
Once an appraiser has returned an opinion on value, the parties can use this opinion to negotiate the division of community assets. Property division when it comes to a family business can be complex, so a fair appraisal is critical to reaching an appropriate outcome.