Many people believe that a separate property business (meaning a business established prior to marriage) is off limits for the proverbial divorce chopping block. In most instances, especially those involving a service based business, this could not be further from the truth.
In a service based industry, where one (or both) spouse(s) work in the business, the community estate can gain an interest pursuant to the case of Pereira. Pereria, which was decided nearly 100 years ago, carves out a community property interest in a separate property asset. The analysis is based on the following rationale,
WHERE THE PERSONAL LABOR INVESTED IS THE PRIMARY SOURCE OF GROWTH - A PEREIRA APORTIONMENT ROVIDES A FAIR APPRECIATION AT THE LEGAL RATE OF RETURN TO THE CAPITAL AND ASSIGNS THE REST OF APPRECIATION AS GROWTH FROM LABOR
In real world litigation or mediation perspective, the Pereira interest is generally determined by obtaining two different business valuations, date of marriage and date of separation. In most cases, the difference between these two values makes up the community property interest.
During the valuation process, a significant amount of work needs to be performed by your lawyers and forensic accounting expert. You want to make sure that both individuals are readily familiar with your business, your industry and the overall condition of the market. I myself have handled dozens of cases involving complex business valuations. Valuing some of these business, some of which grossed yearly figures above $100,000,000.00, required considerable leg work in investigating and understanding that particular industry.
* Maintain all relevant financial records for a valuation throughout marriage. Most banks and financial institutions get rid of records after 7 years. Said records include, but are not limited to, tax returns, profit and loss statements, and general ledgers.
* Hire an attorney who is experienced in working with valuation experts in assessing businesses from various different industries.