Orange County Divorce for Small Business Owners
Divorce is a complex and emotionally taxing process, particularly when a small business is involved. For small business owners involved in an Orange County divorce, understanding how the courts address the valuation and division of a small 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 navigating these turbulent waters.
This article is intended to assist you in working with your lawyer, if you choose to retain one. 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 lawyer and a forensic accountant can be problematic for many people. The question to be asked is: What may be the financial cost to you if you don’t have a lawyer and an accountant, in terms of an excessive value of your small business? The fees you pay a lawyer in an Orange County divorce may end up being your best investment ever. In other words, if you pay a lawyer $25,000 to represent you and the court’s order as to the value of your business is $150,000 less than your spouse had demanded, the investment would have been more than good. Spending $25,000 to save $150,000 is a rather big win. Of course, the lawyer cannot guarantee such a return on his fees, a specific result in court, or a certain outcome in a negotiated settlement.
However, if hiring a lawyer to represent you, as your attorney of record and appear in court, if necessary, is simply not an option, this article will explain a few options.
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 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 $200,000, your spouse is entitled to assets of an equivalent value to maintain the balance of the division. This is where the complexity begins. A small business might not have a high value but might represent a significant 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 $200,000 and the other community assets total $100,000, the total estate equals $300,000. In order to equalize the estate, the party awarded the business would need to pay the other party $50,000 to equalize the asset the division. This sum might have to be paid over a number of years. This example points out how important it is to arrive at an accurate value for a small business.
The Challenge of Valuing a Small Business in an Orange County Divorce
Valuing a small business is inherently more challenging than appraising larger, more established company. This difficulty arises from the nuanced nature of small businesses, where value can be tied to the owner’s personal reputation, client relationships, and other intangible assets. In a divorce involving a business, engaging an Orange County divorce lawyer and a forensic accountant is always advisable, if the resources are available. These specialists employ sophisticated techniques to ascertain the value of the business, considering factors like goodwill, accounts receivable, equipment, and liabilities.
However, the expertise of lawyers and forensic accountants comes at a cost, raising concerns for small business owners whose operations may not generate enough income to cover such expenses during a divorce. It is often the case that a small business generates just enough money to pay the owner’s personal bills and is essentially just a job.
The Value of a Business—Investment Value
A common misconception is that a business lacks value if it heavily relies on the spouse operating it. However, in an Orange County divorce, businesses are valued based on their “investment value” — the theoretical worth to the owner as an 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.
The Risk of Going It Alone
The stakes are high in a divorce involving a business. Without the proper legal and financial advice, you risk a significant financial loss. This risk is magnified if your spouse hires a skilled divorce attorney and forensic accountant and you do not. The disparity in preparedness and resources can leave you vulnerable to a very unfavorable outcome. It should be clear that if the valuation issue is tried in an Orange County family law court, the judge will be required to render an opinion of value of your small business. Judges want and need the parties to provide them with evidence of value because without evidence, they cannot arrive at a reasonably accurate opinion of the value of the small business. If you do not provide a judge with evidence of value and the judge values the small business incorrectly, it is you fault not that of the judge.
Solutions and Strategies
For those facing the challenge of going through an Orange County divorce without sufficient resources to retain a lawyer and a forensic accountant, below are a few options:
1. Attempt to agree to the value of your small business and the value of the other assets in mediation. This can be a successful and cost-effective way to settle this issue. While mediators are not to give legal advice, they can guide parties to solutions. Mediators can also introduce parties to a forensic accountant who can assist. It is helpful if the mediator understands business valuation in the context of a divorce, most don’t. If you select the mediation model, inquire in a detailed manner about the mediator’s experience with divorces involving businesses.
2. Retain a lawyer with a relatively low hourly rate as a ‘consultant,’ not to actually represent you in the divorce. This will result in a lower retainer or possibly an arrangement where you pay by the hour, and you pay as the time is spent. You need to find a lawyer who has experience with businesses in the context of an Orange County divorce and someone who is willing to introduce you to one of the newer and lower cost forensic accountants who is also willing to ‘consult’ with you on the ‘big picture’ value of your business as opposed to preparing a full valuation report. The objective of these meetings would be to give you a range of values to work with in negotiating the business value with your spouse.
3. The last option, which is not advisable, is to meet with an Orange County divorce attorney and an accountant in an attempt to understand the issues well enough to testify in court as to the value of your business. The internet has countless articles on the valuation of businesses in California divorces that can help with this project. Even though your case is an Orange County divorce, the same valuation rules and principles apply in Orange County as apply throughout the state. The California Evidence code specifically allows an owner of an asset to testify as to its value. One of the judge’s key issues will be whether your opinion is well founded– is there a good foundation for your value. The objective of the meetings with a lawyer and an accountant and the self-study would be, to present to the court your logic and the backup for your opinion of value. The judge will want you to explain exactly why you arrived at your valuation and will ask exactly what you did in arriving at your opinion of value. In other words the judge will ask about the basis of your opinion, who you spoke with, what you read, etc. If you choose to go down this rather challenging path, you should also consider meeting with the no cost, Orange County Superior Court’s Facilitator’s Office to allow them to help with the preparation of the many required court forms and to answer basic questions. While you are at the courthouse, if a judge has been assigned to your case, consider watching several of the judge’s hearings.
Conclusion
Divorce involving a small business requires careful navigation and thought. By understanding the court’s approach to asset division, recognizing the unique challenges of valuing a small 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 Orange County divorce.