Business Valuation Should Not be Adjusted by the Hypothetical Value of an Employment Contract

Husband’s reputation and experience in the investment industry enabled him to start an asset management company. At trial, the divorce court used the comparable-sales method to set the company’s value.  Husband’s divorce lawyer attempted to reduce the value of the company by arguing that when a closely held corporation is sold, the principal is generally retained as an employee for five to ten years.  Since the sale of the company, under a comparable-sales method, likely included the value of the husband’s hypothetical employment contract, the value of the company should be correspondingly reduced because the husband’s post-separation employment income is separate property.  The divorce court disagreed and husband’s divorce lawyer appealed.

The Fourth District agreed with wife’s family law attorney and affirmed the divorce court’s ruling by holding that a hypothetical employment contract based upon a hypothetical future sale was too speculative to serve as a factor in determining the present value of a business for division in a divorce.

In re Marriage of Duncan (2001) 90 Cal. App. 4th 617