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Priceless: Why Business Valuations Are Crucial in Divorce Cases

Last year, when Amazon’s CEO and founder, Jeff Bezos, announced that he and his then-wife, MacKenzie Tuttle, were getting a divorce after 25 years of marriage, it caused a media storm of speculation about how their divorce would affect the ownership of the tech conglomerate.

When Bezos’ divorce was finalized, he retained 75% of his Amazon, with 25% going to Tuttle. However, Bezos retained 100% of the voting rights of the stock that was divided between the former couple. So, why was there such a big concern about the ownership future of Amazon?

Community Property

Bezos’ divorce was filed in Washington, a state that utilizes the community property system of property division in divorce cases. There are only a handful of states that adhere to community property principles when determining asset distribution for divorce cases.

The following states are community property states[NS1] :

  • California
  • Arizona
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

According to community property principles, both spouses have an ownership interest in the marital community estate, which is divided between them at divorce. All property acquired during marriage is considered community property unless it qualifies as a spouse’s separate property. Any property acquired before marriage or after divorce is deemed the sole property of the spouse who acquired it. Additionally, property a spouse acquires in their sole name through gift, bequest, or devise is their sole and separate property.

However, community property isn’t necessarily restricted to the narrower, conventional notion of property. It can include money, financial assets—such as checking accounts and retirement plans—and businesses.

Business Ownership as Community Property

In many community property jurisdictions—including California—a business acquired during marriage is generally considered to be part of the marital community estate. When physical assets are divided in divorce proceedings, one party often takes possession of the entire asset while the other receives payment for some fraction of its value. This process requires the court to have proof regarding the asset’s value.

Dividing businesses can follow a similar process. Business valuations can be very complex, depending on the circumstances. If the couple’s ownership interest in a business is represented by publically traded shares of stock, dividing the interest in a divorce can be relatively easier as the process could simply be a matter of splitting the stock between the spouses’ individual accounts. However, closely held businesses can prove to be a challenge as a party’s ownership interest isn’t already quantified the way publically traded companies are.

Business valuation issues that typically arise in divorce include:

  • The fair market value of the business as a whole – the court could accept what a reasonable market participant would pay to acquire the business. For publically traded companies, their stock price represents its fair market value. For closely held companies, an appraiser could assess the business’ fair market value.
  • The book value of the business as a whole – the court could consider the value of the business’ assets and liabilities. An appraiser can usually accomplish this as well.
  • The time value of a business – because divorce proceedings are notoriously time-consuming, it is often necessary to assess the value of a business at a particular point in time.

Use of Financial Experts and Legal Professionals

Different valuation methods depend on the circumstances and the party’s needs. For example, if a spouse is likely to receive payment for their community property interest in a business, they will want proof that maximizes the value of the company. Sometimes, the book value of a business might be slightly higher or lower than its fair market value. As a result, the spouse would want to develop an argument for using the business’ book value over its fair market value.

These issues often require the professional services of a reputable Certified Public Accountant and another financial expert with experience in business valuations and the types of issues that arise in divorce cases. A CPA and attorney should work together to find the best approach to valuing a business to promote the client’s best interests.

Bremer, Whyte, Brown & O’Meara Can Help You

If your divorce involves high-value assets and complex issues, such as business valuations, you should seek legal counsel to ensure important issues affecting your interests aren’t overlooked. At Bremer, Whyte, Brown & O’Meara, you can count on our experience and dedication to providing comprehensive legal advice and advocacy to help preserve you and your family’s legal rights and interests.

Contact our office online or call us at (949) 229-8546 to arrange a consultation today.

[NS1]What about California????