Determining a value of your joint assets and deciding who’s entitled to what is one of the most contentious aspects of divorce. California is known as a Community Property State, meaning most assets are considered to be subject to a 50/50 split in the absence of other provisions, like prenuptial agreements. But how does your legal team determine the value of your assets if you own a business? We’ll show you how important assets are valued and protected in typical divorce proceedings.
Ownership and What You Owe
The first step in determining the value of a business is figuring out the ratio between what your business owns versus what it owes. Ownership is calculated by considering both tangible and intangible items. For example, tangible items might be things like office furniture, inventory, or machinery. When it comes to determining the value of tangible items and the complex division of property, every last Swingline stapler will be taken under advisement.
Next, your legal team of divorce attorneys will estimate what your intangible resources are. Intangibles can be things like patents, copyrights, or even customer relationships. What your business owes, or its liabilities, will be another aspect your legal team will use to value your business. Liabilities come from things like loans, services, and leases.
Your Revenue Stream
Perhaps the most obvious step in calculating your company’s worth is figuring out what your company makes. The basic formula your legal team will use is:
Income is defined as the amount of money your company receives in exchange for the goods or services it provides. Investment income is also included in this calculation.
Expenses are anything your company pays to keep your business running. Things like overhead (rent and utilities) as well as anything you directly pay to produce your product go into determining what your expenses are.
Process of Assigning Value to Your Business
Your legal team will most likely use one of two common approaches to placing an approximate value for your business. The first is referred to as the Book Value Method. In this approach, your legal team will use your corporate records to ascertain a value of the aspects detailed above. In the Book Value Method, your legal accountants will also take depreciation into consideration and adjust anything they think has increased in value.
The second method is called The Earnings or Market Approach. Essentially, accountants use this to determine the current fair market value of your business. In other words, they’ll figure out what an investor would be willing to pay for it based on current and future earning capacity.
Determining a Valuation Date
A valuation date is simply defined as the point in time in which your business is assigned a numerical value. In divorce proceedings, the date of valuation is especially important. Usually, your divorce accountants will try to assign a value to your business as close to the litigation deadline as possible.
Protecting Your Interests
According to Divorce Financial Strategist Jeff Landers, spouses will often try to use their companies as leverage in what he refers to as SIDS (Sudden Income Deficit Syndrome). According to Landers, some spouses will start bad-mouthing the business long in advance of a divorce announcement to downplay the company’s worth. Miles Mason, J.D., CPA, told Forbes:
“When they know divorce is on the horizon, business owners draw less income because they control their own compensation and simultaneously clamp down on personal spending to appear broke. Some even sell their luxury cars and buy compact cars. Others move out of the house and into a friend’s guest house and never go out in public, even normal social commitments. […] The only way to catch these types of scams is to sweat the details. The tax returns must be analyzed over time – both personal and business. Have a forensic accountant look at the business’ financials and loan applications and compare them to the tax returns.”