Business valuation is a more nuanced and complex area of law that sometimes arises in the context of a family-law divorce. Arizona is a community property state, and the general rule for community property is that property acquired before marriage is considered separate property of that spouse, and property acquired after the marriage as a result of the efforts of one or both spouses is considered property of the community (with each spouse having a one-half interest in the property). This general rule seems straightforward, but when the spouses own a business and are dividing property associated with that business, the issue becomes more complex.
Whether the business was started before marriage or during the marriage, upon divorce the issue becomes how to value the business so that the value can be divided in accordance with community property principles. The starting point for business valuation is to add up the value of the business’s hard (tangible) assets (e.g., equipment). However, in Arizona, business valuation can also include the intangible asset of “goodwill.” The intangible asset of goodwill can be thought of as reputation, or that which contributes to the probability of repeat customers.
There are different ways of determining business valuation, and, typically, an expert is used to determine the valuation of the business. One method for determining business valuation is the fair-market value method under which the business is valued according to what a willing buyer on the fair market would pay for the business. Another method is the book-value method. Under this method, the business is valued according to the hard assets it owns but does not take into account intangible assets like goodwill (discussed above). Other methods for valuing businesses include the rule-of-thumb method and the fair-method. In litigation, one expert’s opinion regarding business valuation may differ significantly from another, and ultimately it will be up to the court to decide which testimony is most credible.
Also, a note about businesses started before marriage: while it is true that the business started before marriage will be considered separate property under community property principles, the other spouse nevertheless may have a claim to the amount of increased value that occurred during the marriage (as that increased value could be considered community property).
Finally, as a practical note, in some circumstances it become very clear that only one of the former spouses is capable of operating the business. In those cases, the spouse who keeps the business will need to appropriately compensate the other spouse for his/her interest in the business. On the other hand, if both of the spouses can operate the business, party who is willing to pay the most to the other party will typically get the business.
Harlow & Heckele, PLLC’s experienced family law attorneys can help you with your business valuation matters. CALL TODAY for a consultation: (520) 433-9031. Or email us at firstname.lastname@example.org