The valuation of a community business in Dissolution cases raises a number of issues, including what date should be used in valuing the business. Let’s look at a practical example.
A frequent scenario involves a business which was started or purchased during marriage, with one or both spouses managing the business. After separation, one of the spouses then continues to manage the business. From the date of separation until the trial on division of community property, the business may increase or decrease in value. In such cases, what is the appropriate date to value the business for the purpose of division of the community property interest?
In making an equal division of the community estate the court must ordinarily value the community assets and liabilities as close as practicable to the date of trial. (Family Code Section 2552(a). Selecting a date as near as practicable to trial can depend on a number of factors, including the time necessary for the experts to complete their reports.
The exception to this general rule falls under FC 2552(b). On 30 days notice by the moving party and a showing of good cause, the court may value some or all of the assets and liabilities as of any date after separation and before the trial to make an equal division in an equitable manner. Good cause requires that the managing spouse’s post-marital efforts and skills have largely contributed to the business operations and any appreciation in value. This exception usually applies to professional practices in which its value and success depend almost exclusively on the spouse’s skill, industry, guidance and reputation. Marriage of Stevenson. Court’s have found this exception to be appropriate in valuing a medical practice, Law practice, and Real Estate sales.
The party requesting the alternate valuation date has the burden to show that the predominant reason for the increase in the value of the business is due to the post-marital efforts of the managing spouse. In other words, the spouse did something different during this period of time: brought in additional clients, performed more services (e.g. number of patients seen in solo medical practice), billed more than average hours during marriage (e.g. solo attorney practice) or did something identifiable to bring in additional revenue. If the business is doing better simply because the economy has improved or the business continued to experience normalized gains (consistent with the average increase during marriage), these factors would not justify an alternate valuation date.
If one party requests an alternate valuation date, the court may bifiurcate the trial and have a separate trial on just the date of valuation. After the court makes a determination on the date, the experts would then have time to update their reports before the trial on valuation of the business. In the alternative, the experts may prepare two reports: (1) closest practicable to date of trial, and (2) alternate date (such as date of separation.) The trial could then proceed on both issues of date of valuation and the actual valuation of the business.
Do you want to hear more about the latest information on business valuation in dissolution? If you have questions regarding this issue, please contact our office to schedule a consultation. The Law Office of Family Law Specialist Richard E. Bawden also handles legal issues regarding adoption, annulment, mediation, domestic violence, child custody, child support, spousal support and bankruptcy as well as pre-marital agreements. Telephone (909)792-0222, or email us at [email protected]