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Small Business Valuations in Divorce Cases

Small Business Valuations in Divorce Cases

Posted on January 22nd, 2012

San Diego Divorce Lawyers – Recent Case Law Involving Comparable Sales Approach to Business Valuation

In the recent, unpublished matter of IRMO Price & Turkanis, (Dist. 2, Division 8, Filed May 11, 2011), the Court of Appeal affirmed the trial court’s use of a comparable sales approach to value a community property business.  In this case, the husband owned 78% of a radiology business on the date that he married his wife in 1995.  Between 1995 and 1998, the husband’s business increased in value and was sold to another company for $7.4 million.  The parties agreed to value the community’s interest in husband’s business using the Pereira case, and that the husband would be entitled to a rate of return of 7.19% simple interest on the value of the business from the date of marriage.  There was evidence of the business’ pre-marriage income and post-separation earnings.

At trial, three experts testified regarding the business’ valuation, using various valuation methods including capitalization of cash flow, the capitalization of excess earnings, and a comparable transaction analysis.  The experts varied in valuing the business as of the date of marriage, one saying the value was $0.00 and one saying the value was $6.2 million.  The trial court ultimately ruled that the value was $6.2 million as of the date of marriage.  Further, the court ruled that the increase in value of the business did not necessarily occur during marriage, which is what the wife wanted the court to rule, citing Family Code 760.  By agreeing to value the husband’s business using the Pereira case, the wife’s argument failed.  The wife should not have agreed to use that case as a benchmark to value the husband’s business, and should have instead considered arguing for the Van Camp case as the proper valuation method.  The court noted that the date of acquisition determines the character of the property.

In divorce and legal separation cases, if either party owns a business, or if the community owns a business, the valuation, division and ultimate disposition of the property can be a tricky endeavor.  It is important to have an experienced attorney working hard on your behalf to help determine the best strategy for your case.  This planning should be done in the early stages of the divorce, if not before a case is ever filed.  Feel free to call our office at (619) 284-4113 or visit our Contact Us page to schedule your free initial, private consultation today.