In this episode, host Ben Town sits down with forensic accountant and Certified Valuation Analyst Megan Thompson to explore how business valuation works in the context of divorce — and how it differs from other valuation contexts such as tax reporting, gifting, or buying and selling companies. Megan explains that in family law, businesses are community property that must be divided, and that the governing rules come almost entirely from California case law rather than IRS or GAAP guidance. The conversation covers key concepts including marital value, replacement compensation, goodwill, valuation dates, and the impact of COVID-19 on closely held businesses. Throughout, Megan emphasizes her role as an independent expert — not a hired gun — whose ultimate audience is always the judge. The episode closes with a personal look at why Megan finds her work rewarding: the puzzle-solving nature of forensic accounting and the satisfaction of helping clients navigate a difficult process as efficiently and cost-effectively as possible.
Chapter 1: Welcome to Max Value
Ben Town introduces the episode and welcomes Megan Thompson, a forensic accountant with 21 years of experience practicing almost exclusively in family law in Santa Clara County. Megan holds credentials as a CPA, Certified Valuation Analyst (CVA), and is certified in financial forensics. Her practice focuses on business valuations, separate property tracing, and income available for support.
Chapter 2: Why Business Valuation Matters in Divorce
Megan explains that businesses started during marriage are community property and must be valued and divided in a divorce. Unlike standard valuation contexts — where fair market value, fair value, or strategic value provide clear rules — family law uses “marital value,” which generally means valuing the business without discounts or premiums. A key distinction is that marital valuation includes assets like cash, accounts receivable, and shareholder loans that would typically be excluded in a sale context, because in community property all such assets are jointly owned.
Chapter 3: Family Court Rules & Case Law
All guidance for family law business valuations comes from court cases rather than IRS or GAAP standards, with foundational cases like Marriage of Honer defining marital value. The courts generally reject discounted cash flow (DCF) methods and forward-looking projections, relying instead on historical data — largely because anything earned after the date of separation is the separatee’s separate property, and because projections from a biased party (who either wants the business worth more or less) are considered unreliable compared to IRS-filed, CPA-prepared historical financials.
Chapter 4: Independence & Expert Objectivity
Megan stresses that she operates as an independent expert — not a hired gun or advocate — and will not simply do whatever her client asks. When both sides retain their own expert, a meet-and-confer process is used to narrow the issues before the judge, producing a side-by-side comparison that identifies agreed items and isolates the key disagreements (such as replacement compensation). In cases where the two sides provide completely different factual accounts, the experts present both positions and leave it to the trier of fact to decide.
Chapter 5: Replacement Compensation in Valuation
Replacement compensation — the hypothetical cost to replace the owner-operator — directly impacts cash flow and therefore business value: a higher replacement comp reduces value, while a lower one inflates it. This means each party has a strategic interest in arguing for a specific figure, which can also affect income available for support, making the two analyses deeply interrelated. The famous Marriage of McTiernan case illustrates an extreme: a Hollywood director whose replacement compensation was so high it wiped out any business value, but whose support award was correspondingly substantial.
Chapter 6: Valuation Dates & Their Impact
Assets are generally valued at the date closest to trial, but parties can petition for an alternate valuation date — most commonly the date of separation — especially for service businesses, where post-separation changes in value are attributable to the separatee’s own efforts and are therefore their separate property. After the date of separation, the owner has complete control and could let the business decline to reduce its value, or it could spike through their own work; the community’s right to participate in either outcome is legally unsettled and highly fact-specific.
Chapter 7: Goodwill in Family Law
In California family law, goodwill is calculated using the excess earnings method — the capitalized value of cash flow above what the assets alone generate — and personal goodwill is treated as part of the community estate rather than backed out as a separate asset (unlike some other states). Instead of quantifying personal goodwill specifically, California practitioners address it through replacement compensation. Megan notes this differs from other states, a point highlighted during her February 2025 AICPA panel presentation attended by roughly a thousand forensic accountants nationwide.
Chapter 8: Related Party Transactions & Equity
Related party transactions — such as shareholder loans and non-arm’s-length dealings — are typically normalized out of the business valuation, but Megan emphasizes that attorneys must not forget them: a $250,000 shareholder loan pulled from the valuation is still a community asset or liability that belongs in the property division. Because family court is a court of equity, every dollar moved between entities must be accounted for fairly — a consideration that does not arise in estate tax or other standard valuation contexts.
Chapter 9: COVID-19’s Effect on Valuation
COVID produced both dramatic spikes and dips in business income, and contrary to popular assumption, many businesses — including construction and tech-adjacent companies — thrived. For valuation purposes, anomalous COVID items like PPP loans and SBA forgiven amounts must be adjusted out, and government assistance that replaced lost income should not automatically be backed out since it may normalize the income statement. Megan notes that businesses with a date of separation around 2021–2022 face a particularly difficult analytical problem: it is hard to disentangle whether post-separation changes reflect COVID’s end or the separatee’s own separate-property efforts.
Chapter 10: Types of Businesses Valued in Divorce
Megan’s practice centers on small, closely held businesses — dentists, doctors, construction companies — where the first question is often whether the entity is a “business” or merely a “job.” A sensitivity analysis is used to test whether cash flow exceeds replacement compensation at all, since a business that doesn’t clear that bar may have no real value to divide. Regardless, because all community assets must be addressed in property division, even low-value businesses require a formal assessment.
Chapter 11: Hidden Issues in Small Business Valuations
The single biggest issue in small business valuations is personal expenses run through the business — mortgages, personal purchases, and other items that must be identified and added back to normalize income. Such add-backs not only affect the valuation but can also create reimbursement claims for the non-owner spouse. Megan observes that smaller businesses tend to have more egregious and creative personal expenses in their books than larger ones, and that truly clean books are the exception rather than the rule.
Chapter 12: Accuracy, Trust & Cost-Benefit Decisions
With small businesses, record quality is often poor — bank-statement-level bookkeeping submitted to the IRS “under penalty of perjury” but of questionable accuracy — which forces a cost-benefit conversation: is it worth paying to reconstruct five years of books for a business probably not worth very much? This is compounded by the breakdown of trust in divorce: the out-spouse cannot rely on books provided by someone they no longer trust, so Megan must corroborate records against supporting documents. These dynamics are similar to a partnership dispute, but more personal.
Chapter 13: Why This Work Matters
Megan finds her work rewarding for two reasons: the intellectual satisfaction of solving complex puzzles — tracing separate property, reconciling competing facts, arriving at a clean answer — and the genuine impact she has on clients navigating one of the hardest periods of their lives. Her goal is always to get clients through the process quickly, efficiently, and cost-effectively, and she frequently receives heartfelt thanks from clients who feel she helped them reach the other side.
Chapter 14: How to Connect with Megan Thompson
Megan can be reached by email at megan@thompsonaccounting.net or found on LinkedIn, where she will provide her email upon connection. Ben closes by thanking Megan for the conversation, and the episode ends with the show’s music outro.