Where the value of a closely held separate property small business, regardless of the entity choice utilized, appreciates during marriage at least partially due to the community property efforts of the separate property spouse, the increase in fair market value attributable to the CP labor of the separate property spouse requires apportionment between both spouses. Determining the amount requiring such apportionment is ordinarily determined using either the Pereira or Van Camp approach, or a combination of these valuation methodologies. The choice of which approach to use turns on what is viewed to have caused the increase in fair market value over the life of the marriage.
A court utilizing either Pereira or Van Camp will first attempt to establish the fair market value of the business at the date of marriage which is wholly allocated to the separate property spouse. This is a great reason to advise couples contemplating marriage to get a valuation of their separate property businesses close to the date of marriage.
The Pereira Approach to Apportionment of Interest
The Pereira approach originated in Pereira v Pereira (1909) 156 CA 1. A court utilizing the Pereira approach will determine a reasonable rate of return expected for the type of business at issue and allocate it along with the value of the separate property business at date of marriage to the separate property business owner spouse. Any remaining increase in Fair Market Value achieved over the life of the marriage is allocated to the community property martial estate.
The Pereira approach will be utilized where a court believes the appreciation in the value of a business over the life of a marriage is mostly due to the skills, efforts and talents of the separate property business owner spouse.
The Van Camp Approach to Apportionment of Interest
The Van Camp approach originated in Van Camp v Van Camp (1921) 53 CA 17) where a valuation expert first determines the reasonable value of the separate property spouses’ labor reduced by the value of any direct or indirect compensation received during the marriage, and then allocates this additional sum, if any, to the marital community with the balance of any increase apportioned to the separate property spouse.
The Van Camp approach will be utilized by a court where the majority of the increase in fair market value of the separate property business over the life of the marriage is believed to be related to factors aside from the community efforts of the separate business owner spouse, like the economy, the capital invested in the business or the type of the business itself, market timing, expertise and value of the management team and or the large number of contributing employees, the community estate gets awarded for what the separate property spouse might have been paid for similar work with any remaining increase in fair market value being allocated to the separate property of the business owner spouse.
In light of the above, the three most important valuation dates in assisting client and divorce counsel in valuing separate property businesses in divorce scenarios are (1) the date of marriage, (2) the date of separation, and (3) the trial date.