On behalf of Morna Challoner of Challoner Law posted in blog on Monday, October 2, 2017.
Going through divorce will cause you to face many concerns. Some of the biggest apprehensions may relate to how property division will turn out and other possible financial impacts. As a business owner, you may feel particular anxiety when it comes to the potential of losing a portion of your company to your ex-spouse as part of the divorce settlement.
Dividing business assets can often present challenges. In particular, valuing a business may not always go as straightforwardly as hoped, as many different factors could have an important role to play. You may want to better understand how active and passive appreciation could impact valuation.
With active appreciation, your direct actions contribute to your company’s value increasing. These actions could range from bettering the company through various growth efforts to creating and enacting business strategies that make your business a top competitor. In relation to divorce, value attributed to active appreciation during the time of your marriage will likely go through property division proceedings.
Because of this factor, determining which portion of your company’s value came from active appreciation and which came from passive appreciation may seem vital.
As the name suggests, passive appreciation involves an increase in business value with no effort from you. This type of appreciation often gets attributed to economic growth, industry growth, interest rate changes or demographic trends. The portion of business value associated with passive appreciation does not get divided during divorce proceedings.
Determining active vs passive appreciation
During the business valuation process, determining what value comes from active appreciation versus passive appreciation has its difficulties. Often, a professional evaluator’s insight plays a role during this process. However, even a professional may have a challenging time determining whether active appreciation occurred due to your direct actions or to the actions of other employees. If other employees contributed, that appreciation value may not fall into the category of marital property.
The property division process can have its complications no matter what type of property is involved, but business assets typically have a more complex nature. Therefore, if you have concerns regarding how business valuation may apply to your divorce and what portion of your company could face property division proceedings, you may want to obtain additional information. Consulting with legal professionals regarding California state law on the issue may prove beneficial as you move forward with this complex endeavor.