At CROSSCOR Valuations & Forensics Inc., we provide business valuations (appraisals) in divorce litigation and divorce mediation matters. Business valuations are used to divide the separate property business or the community property business. A business valuation is an estimate of the economic (not emotional) value of a business (or a partial interest in it) as of a certain date. The Value of a Thing is the Price it Will Bring is the most basic principal when valuing anything (including a business). Using a simple analogy, a grossly overpriced house will not attract any buyers and a grossly underpriced house will attract everybody. Therefore, a reasonably priced house will attract an expected market of buyers. One buyer (or even two) generally does not make a market.
Since valuing a business is a process and not an exact science, business valuators have different (and often controversial) opinions concerning the value of a business especially in divorce litigation. While there may be different opinions, the value of a business should be based on all the relevant “facts” weighed by informed judgment, common sense and “reasonableness.” The capitalized excess earnings method is commonly used to value a business in divorce matters. Unreported income and personal expenses deducted as business expenses lower the reported earnings of a business, which lower the value of a business if not adjusted.
If the character of the business is community property, which means that the business was acquired or formed during marriage by either spouse, then you only need one business valuation as of a certain date. The date of trial (using the most practicable date closest to it) is the presumed valuation date of the business. However, the presumed valuation date can be rebutted. In which case, the date of separation or an alternate valuation date before the date of trial is used to value the business.
If the character of the business is separate property, which means that the business was acquired or formed before the date of marriage by one spouse, you need two business valuations as of two certain dates. You need a business valuation as of the date of marriage and one as of the date of trial (unless the date of separation is used as an alternate valuation date). The two most common case laws (or precedents) that apply to apportioning the separate property business that appreciated during marriage are the Marriage of Pereira and the Marriage of Van Camp, which are often referred to as Pereira Van Camp even though they are two distinguishable cases.
“To be persuasive we must be believable. To be believable we must be credible. To be credible we must be truthful.” (A quote from Edward R. Murrow posted in the vestibule of Judge James Waltz, Orange County Superior Court)