Newport Beach Divorce Lawyer For Business Owners

Divorce is a complex and emotionally taxing process, particularly when a business is involved. For business owners involved in a divorce, understanding how the courts address the valuation and division of a business is crucial. Unlike the straightforward division of simpler assets, a business adds layers of complexity to the divorce proceedings. This article aims to shed light on this intricate process and offer guidance to those dealing with these issues.

This article is intended to assist you in working with your divorce lawyer. The more you understand about the process of business valuation, the more valuable you will be to your lawyer and a forensic accountant in the process and the more efficient and cost effective the process can be.

Affording a divorce lawyer and a forensic accountant can be problematic for many people. The question to be asked is: What may be the financial cost if you don’t have a lawyer and an accountant, in terms of a incorrect or unrealistic value of your business? The fees you pay a lawyer in an Newport Beach divorce may end up being your best investment ever, when considering what the business was versus what it might have been had you not hired experts.

Are All Divorce Lawyers Qualified To Handle Cases That Involve The Ownership of A Business?

The clear answer is no. the question is somewhat akin to asking if a skilled dentist without training in orthodontia can skillfully serve as an orthodontist. Yes, he can install the braces but not as successfully as a trained and experienced orthodontist. Family law lawyers handle many different areas of law including: child custody, child support, spousal support, real estate, retirement plans, deferred compensation, characterization of property whether separate or community, domestic violence restraining orders, etc. It is unlikely that any one divorce lawyer is truly trained and skilled in all of these areas. Many divorce lawyers limit their practices to certain aspects of family law. Domestic violence is a large part of some practices and child custody is a large part of other practices. There is very little cross over between handling a divorce with domestic violence and child custody and a divorce involving the characterization and valuation of a business. A divorce lawyer may be one of the best child custody lawyers in California and have essentially no training or experience in the relevant areas of business valuation in the context of a divorce.

Do You Need An Expert To Value A Business In A Divorce?

Technically, the owner of a business may testify as to its value. However, the weight and value of that testimony will likely not be persuasive to a court, especially if the other party has retained an experienced valuation expert. It is likely that the owner of a business will not understand the legal issues involved in the valuation process specific to family law or the rules of evidence, which may prevent him from testifying and prevent his supporting documents from being admitted into evidence.

The expert will testify as to the value of the business after having done extensive research and analysis relative to the business. The judicial officer will likely be familiar with the expert, his experience and his credibility. The court will determine which side has the more persuasive evidence of value and make its order accordingly. It is highly unlikely that a judicial officer will rely on the testimony of the owner of a business whose only basis for forming an opinion of the business value is that of an owner.

When Should The Expert Be Retained?

An expert should be retained immediately after retaining a divorce lawyer. The valuation process should begin when the divorce begins. It may take a significant time to gather the necessary information. The best experts are extremely busy and have a significant backlog of work. Delaying the commencement of the valuation process will significantly delay the resolution of the divorce itself. It is often the case that the experts on both sides play a significant role in resolving individual issues and the case itself. They cannot play that role if they have not completed their work.

Can You Use Your Own Accountant In The Divorce?

A person can use their personal accountant to perform the accounting projects in a divorce but doing so is unwise at best. The accountant is most likely not a valuation expert and most likely is not familiar with the family law statutes and cases that relate to business valuation. A tax accountant is generally not experienced or educated in the areas that relate to the valuation of a business. A party’s accountant is most likely not trained as an expert witness and is not familiar with the particular judicial officer assigned to the case. Lastly and maybe most importantly, the judicial officer may have questions about the objectivity and credibility of a party’s personal accountant.

What Do I Need To Disclose To My Spouse About The Business During The Divorce?

The owner of a business must provide the other spouse with all relevant material facts and information about the business. There is some question as to exactly what that means. Rather than ask what do I need to disclose, the better and safer question is what do I not need to disclose. To avoid a potential set aside of the judgment or settlement after the matter is settled, the owner should over disclose. What does this mean? The owner should provide the other side with every relevant document and fact that relates to the value of the business. Some people explain the issue by saying that the owner should provide the other spouse with everything that a party would want to know, if they were considering buying the business.

What Is “Due Diligence” In The Context Of Addressing Issues Involved In Business Valuation In A Divorce?

Due diligence relative to a divorce is not dissimilar to due diligence relative to what a buyer wants to know relative to buying a business. The main difference is that in the non-divorce context, the buyer must ask for the information, whereas in a divorce the non-operating spouse not only does not need to ask for the information, the operation spouse must voluntarily provide all material facts and information. Due diligence is the process of analyzing a business entity before purchasing it, so as to evaluate risk, potential profit and determine whether or not a person wants to make a purchase and if so, what amount they will pay for the business. Often due diligence involves reviewing contracts, lawsuits, tax returns, financial records, bank loans, leases, intellectual property, etc.

Do I Need To Voluntarily Produce Records Or Wait Until I Am Asked To Produce The Records?

Yes, the law is clear that the owner of the business must voluntarily produce all relevant material facts and information to the other party. This may not be just documentation. It may include information that is not found in a document, like an oral offer to purchase the business.

What Are The Penalties For Failing To Disclose Important Facts About A Business?

Depending on the circumstances of the failure, the intentionality, motivation, or malice, the penalty may be 50% of 100% of the damages resulting from the failure to disclose, in addition to a substantial attorney fee award. The way to avoid this risk, is over-disclose.

Do I Have To Disclose An Offer That I Received To Purchase The Business?

Yes. Any offer would be considered a material fact, even if made orally and even though not consummated. The contents, terms, price and identify of the potential buyer may be very relevant to the value of the business or facts related to it.

Do I Have To Disclose A Recent Appraisal Of The Business?

Yes. Clearly, an appraisal must be disclosed, even though the appraisal is not recent, was for a different purpose, used valuation methods that are not used in family law, and the facts and financial circumstances of the business are significantly different than they were when the appraisal was completed.

Understanding Asset Division

In an Orange County divorce the law mandates an equal division of community property. This does not mean each party is awarded 50% of each individual asset; rather, each party is entitled to 50% of the value of total marital estate. This principle necessitates knowing the value of each asset involved, including any business, because you cannot equally divide assets unless you know their value.

If, for example, if the outcome of your Orange County divorce is that your business is valued at $500,000, your spouse is entitled to assets of an equivalent value to maintain the balance of the division. This is where the complexity begins. A business might not have a high value but might represent a significant overall portion of the marital estate’s total value. This scenario can pose unique challenges in the asset division. For example, if the business value is $%00,000 and the other community assets total $100,000, the total estate equals $600,000. In order to equalize the estate, the party awarded the business would need to pay the other party $200,000 to equalize the asset the division, so that each party received a total of $300,000 each. This sum might have to be paid over a number of years.

What Are The Challenges That Exist In Valuing A Business In An Newport Beach Divorce?

Valuing a business in a divorce is inherently more challenging than appraising a larger, more established company in a non-divorce setting. The difficulties arise, in part, from the nuanced nature of smaller businesses, where value can be tied to the owner’s personal reputation, client relationships, and other intangible assets. In a divorce, the court cannot speculate as to the future income of the business, which in a non-divorce transaction is one of the main ways businesses are valued. Often the records in a smaller business are not as complete and accurate as they are in a larger business. When valuing a business in a divorce, cost is always an issue, which may result in the experts doing less valuation analysis that they would prefer to do. In a divorce involving a business, engaging an Newport Beach divorce lawyer and a forensic accountant is always advisable. These specialists employ sophisticated techniques to ascertain the value of the business, considering factors like goodwill, intellectual property, accounts receivable, equipment, liabilities, etc.

What Is The Investment Value Of A Business In A Divorce?

In a divorce context, businesses are not necessarily valued at fair market value. There are businesses that cannot be sold at a value that equals the true value of a business to the owner. A common misconception is that, in a divorce, a business lacks value if it heavily relies on the spouse operating it. The owner of a business may think that without that person, the business would not exist and that may be the case. However, in a Newport Beach divorce, businesses may be valued based on their “investment value” — the theoretical worth to the owner as the ongoing business, not necessarily what a third party would pay for the business. This approach recognizes the business’s intrinsic value, including the effort and resources the owner has invested.

Summary

Divorces involving a business require careful analysis, strategizing and thought. By understanding the court’s approach to asset division, recognizing the unique challenges of valuing a business, and exploring strategic solutions, you can safeguard your financial interests during this difficult time. Whether through mediation or consultation with specialists, taking proactive steps can help manage the risks and complexities of divorce and business ownership in an Newport Beach divorce.

An In-Depth Exploration Of Separate Property In California Divorce Proceedings

Divorce is seldom a simple process, and one of its more intricate challenges is the division of property. In California, the distinction between separate and community property plays a crucial role in determining the outcome of asset division. Understanding how assets are classified and treated is essential for anyone navigating the complexities of a California divorce. This guide offers a detailed examination of the principles governing separate property, its relationship with community property, and the legal framework that guides property division.

Defining Separate Property

In California, separate property is defined as any property that belongs exclusively to one spouse. This can occur in several situations:

1. Pre-marital Ownership: Property owned by a spouse prior to the marriage.
2. Gifts or Inheritances During Marriage: Assets received by one spouse as a gift or inheritance, even if acquired during the marriage.
3. Post-separation Acquisitions: Property obtained by one spouse after the couple’s separation.

The timing of acquisition is the key factor in determining whether an asset is separate property. If an asset does not fall into one of these categories, it is likely to be considered community property, which consists of assets and earnings acquired by either spouse during the marriage.

Community property is generally divided equally between spouses upon divorce, but this does not mean each asset is split in half. Instead, the court works to ensure a fair division of the total value of all community property, assigning specific assets to each spouse and, if necessary, ordering one spouse to pay the other an equalization payment to balance the distribution.

Gifts And Inheritances: Safeguarded As Separate Property

An important distinction within California’s property laws is the treatment of gifts and inheritances. Regardless of whether they are received before or during the marriage, gifts and inheritances are unequivocally considered separate property. This protection extends as long as these assets are kept distinct from community property.

However, complications can arise if these assets are commingled with community funds. For instance, if inherited money is deposited into a joint account, it could be seen as merged with community assets, potentially making it subject to division. To avoid this, it is vital that gifts and inheritances be kept in separate accounts, ensuring they remain identifiable as separate property.

Businesses Owned Before Marriage: Navigating The Complexities

For spouses who own a business prior to marriage, the business is generally considered their separate property. However, if the business grows in value during the marriage, especially due to the owner-spouse’s efforts, the community may have a claim on that increase in value.

California courts use two primary methods to evaluate the community’s interest in the business:

1. Van Camp Approach: This method is applied when the growth of the business is primarily due to external factors, such as investments or the general market, rather than the personal efforts of the owner-spouse. The community’s claim is typically limited to the value of the owner’s reasonable compensation for their labor during the marriage.
2. Pereira Approach: This formula is used when the business’s success is primarily the result of the owner-spouse’s personal involvement, skill, and work. Under this method, the community may be entitled to a portion of the business’s increased value, after deducting a reasonable return on the separate property interest.

In rare instances, courts may apply both methods during different periods of the marriage, especially if there are significant changes in the nature of the business. Nonetheless, neither the community nor the non-owner spouse acquires ownership in the business itself—their entitlement is strictly to a financial reimbursement tied to the business’s appreciation.

Valuation Of Businesses In Divorce

When a business is created or purchased during the marriage, it is generally considered community property. In most divorce cases, the court will award the business to the spouse actively involved in its operation, but first, the court must determine the business’s value—a process that often requires the expertise of forensic accountants.

California courts employ two primary methodologies for valuing businesses:

1. Capitalization of Earnings: This method assesses the business’s value by capitalizing its current earnings to predict its future profitability.
2. Capitalization of Excess Earnings: This method focuses on the business’s assets and evaluates the value of its excess earnings compared to the expected return on those assets.

These approaches aim to establish the investment value of the business, representing its worth to the spouse who will retain it. This value is distinct from the potential sale price of the business in the open market. If the court orders an equalization payment, it is calculated after taxes and is not tax-deductible for the spouse making the payment.

Separate Property Homes: Applying The Moore Marsden Formula

When a spouse owns a home prior to the marriage, the home is generally considered their separate property. However, if community funds—such as joint income—are used to pay the mortgage or make improvements on the home during the marriage, the community may acquire a proportional interest in the property. This is where the Moore Marsden formula comes into play, a calculation used by the courts to determine how much of the property’s value is attributable to the community.

The formula takes into account the amount of mortgage principal paid with community funds, along with the property’s appreciation during the marriage. If the owner-spouse wishes to convert the home into community property, they must do so through a transmutation, which requires a clear and written agreement. California courts are strict about enforcing this requirement, and verbal agreements or informal arrangements are not sufficient to change ownership status.

The Importance Of The Date Of Separation

In California divorces, the date of separation plays a pivotal role. It marks the point at which the accumulation of community property ceases, and any property acquired thereafter is considered separate property. The date of separation is established when one spouse makes it clear—either through words or actions—that the marital relationship has ended.

It is important to note that simply living apart or taking a temporary break does not necessarily constitute separation. The court considers whether the spouses resumed marital activities, such as cohabitation or financial interdependence, to determine whether the separation was final. Documenting the date of separation is essential to prevent disputes, which could otherwise result in protracted and costly litigation. The date of separation can significantly impact the division of assets, the duration of spousal support, and the responsibility for debts.

Post-separation Finances: Handling Community Expenses

Once the date of separation is established, any income earned by a spouse is considered their separate property. However, questions often arise when one spouse uses their post-separation earnings to pay for community expenses, such as mortgage payments or other debts. In such cases, the paying spouse may be entitled to reimbursement, provided the expense was not for their sole benefit.

To avoid confusion and potential disputes, it is advisable for separating spouses to promptly divide their finances. This includes closing joint accounts, ceasing the use of shared credit cards, and establishing clear boundaries regarding financial responsibilities moving forward.

Practical Considerations For Navigating Separation

To effectively manage the financial aspects of a separation and protect your interests, consider taking the following steps:

1. Open a new individual bank account for your earnings.
2. Close joint accounts and establish separate credit cards.
3. Update all passwords for financial and personal accounts.
4. Consider changing your cell phone plan if it is shared with your spouse.
5. Create a new email account for communicating with your attorney.
6. Limit or avoid social media activity during the divorce process.
7. Seek legal counsel before making significant financial decisions, particularly those involving investments or large purchases.

Selecting The Right Newport Beach Family Law Firm Is Critical To The Success Of Your Family Law Matter

With over 600 divorce lawyers practicing in Orange County, the selection of the right lawyer may appear daunting. However, informed research and careful consideration will lead you to the most suitable lawyer for your situation.

When you need to consult with a family law attorney, call us at 949-724-1111 or send us an email using our online Initial Consultation page. Let Minyard Morris be your partner through the complex world of family law, providing you with the expertise, support, and dedication you need to secure the best possible outcome for your case.