Divorce is rarely simple, but when business ownership is part of the equation, the process can become more complicated. When one or both spouses invest in a business, questions can arise about how it should be valued and distributed under California’s community property laws.
Decisions about a business affect employees, investors, and customers, not just the spouses who are involved in the business. As such, it’s important to seek professional help to protect the interests of all parties involved.
Understanding how Orange County divides business interests in divorce can help prepare a couple for the division of the business’s assets during the divorce proceeding. At Pinkham & Associates, we strategically organize the distribution of assets to ensure the smoothest transition possible.
Community Property and Business Interests in California
California follows community property law, which means that most assets acquired during a marriage are considered community assets and are divided equally between the spouses in a divorce proceeding. Business interests are not an exception to this rule.
- If a business was started after a couple got married, it may be treated as community property.
- Businesses that were owned by one spouse before marriage may be considered separate property, but if the business experienced growth during the marriage, that growth may be considered community property.
- A business may be inherited from one spouse’s parent(s) during a marriage, clouding the line between community property and individual property.
- Money used for the business may have come from both spouses for a business that was originally owned by one spouse, making it difficult to determine which assets should be equally divided.
Each situation is specific to the business and the spouses involved with it. Professional legal and financial analysis is often needed to determine how the business and its assets should be divided.
Valuing a Business in a Divorce
A fair division cannot take place until the parties know what the business is worth. Business valuation is one of the most important (and often the most contested) steps in a divorce involving business ownership. Courts may rely on financial experts and forensic accountants who use the following approaches to value a business.
- Asset approach. One of the simplest approaches to valuing a business is the asset approach. This approach takes the business’s assets and subtracts its liabilities to give a total market value of the business.
- Income approach. Some professionals use an income approach, which gives a value for the business based on current assets plus potential growth.
- Market approach. Finally, the market approach values the business based on the sales of comparable businesses in the last few months.
A combination of these three types of valuations may give the best representation of a business’s true value. Disputes frequently arise between spouses if one spouse’s expert witness uses one method, and the other spouse’s expert witness uses another. If the amounts are not similar, the court will need to rule on which value to rely upon.
Factors Courts Consider When Dividing Business Interests
In Orange County divorces, judges review more than just ownership documents to determine how a business should be divided. They also review:
- Contributions of each spouse. A judge will consider whether one spouse has worked more for the business (like when one spouse works at home while one builds the company).
- Length of the marriage. The length of a couple’s marriage compared to the length of time the business has been in operation is another consideration the judge will make.
- Sacrifices made on behalf of the business. A spouse who has turned away from their original career path to invest their time and talents in the business may be given priority in asset division over another spouse.
- Business continuity. The division of a business and its assets affects more than just the two spouses involved. Courts are typically very cautious when dividing a business to ensure the least amount of disturbance to other parties as possible.
A court ensures that the division of a business is fair and practical while also protecting the viability of the business itself.
Options for a Business In a Divorce
Once a business is valued, the next step will be to divide it. In most cases, several options exist.
Buyout
In a business buyout, one spouse “buys out” the other’s share of the business and its assets, transferring full ownership to one spouse. This is the most common approach when the business is community property, but one spouse has clearly been the primary contributor and operator of the business.
Co-Ownership
In a co-ownership situation, both spouses remain equally invested in the business and own it in equal shares. This type of option requires a high level of communication and agreement between the spouses. It may also require compromise from both spouses.
In a divorce situation, this may not always be a viable option.
Sale of the Business
There is an option to sell the business outright and distribute the assets evenly. This may work for a business that is no longer profitable or has become a burden for both spouses. However, for businesses that are still thriving, it may not be a good solution.
The sale of the business may result in a disruption of income and the loss of employment of one or both spouses. Further, it could harm the business’s employees.
Each option has benefits and challenges. The best choice will depend on the current status of the business and the plans for the business.
Protecting Business Interests in a Divorce
If you’ve built a business from the ground up, you may feel that you can handle the tedious distribution of your business and its assets on your own. This is seldom a good idea.
Having an experienced attorney on your side can help protect your business by:
- Coordinating business valuations with financial experts
- Identifying and protecting separate property interests
- Negotiating settlements that preserve the value of the business
- Preparing for and representing you at trial if necessary
At Pinkham & Associates, we have over 25 years of experience representing clients who are business owners. Our team works with trusted experts to ensure both you and your business are protected during your divorce. Contact us today to discuss your case and learn how we can help you secure the best possible outcome for yourself and your business.
