Dividing a Family Business

But a family business is different. Competing experts valuing a family business will often have dramatically different opinions as to the community interest in a business. They both start from the same, seemingly simple premise — that is, businesses that are created before marriage are separate property, and businesses created during the marriage are presumed to be community property — but from there, the experts’ approaches and methods can vary widely. For example, there are four different methods used to determine the value of a business:

• Book Value
• Comparable Sales/Mergers and Acquisitions
• Capitalization of Cash Flow
• Excess Earnings

Chances are the competing experts will use different methods, which inevitably produces vastly different valuations.

In addition, competing experts also often reach different conclusions as to (1) whether the business has “goodwill” and (2) if it does, what the value of that goodwill is.

Goodwill is often defined as the “expectation of continued public patronage” or the “blue sky” value of the business that is in excess of the company’s net tangible assets. Goodwill is often nebulous because, unlike fixed assets, goodwill generally does not appear on most balance sheets. To arrive at the business’ goodwill, competing experts analyze questions like:

• Are the business’ customers loyal?
• Will the business’ customers continue to return?
• Are the business’ customers willing to pay a premium for its goods or services?
• If so, how much is this premium, and how much (if at all) does it impact the value of the business?

Another issue impacting the business valuation is how much the community has benefitted from the business during the marriage. For example, does the business pay for automobiles, insurance, cell phones, meals, travel, or entertainment? If so, this can increase the value of the business.

During a divorce, assets are generally valued at the “date closest to trial.” Business valuations are sometimes the exception to this rule.

If a business is heavily dependent on a spouse’s talent and skills (for example, a professional service business like a medical practice or law firm), then it is likely that a court will value the business at the time the spouses separate. This outcome can make a big difference because a spouse’s efforts after separation belong to that spouse, so any increase in the value of the business after separation also belongs to that spouse.

On the other hand, if a business is not dependent on a spouse’s talent and skills (for example, the business makes widgets and requires very little active management), then that business would more likely be valued at the date closest to trial.