Many business owners in California decide to get a divorce. One of their first thoughts is, what will happen to their business? In the state of California, companies that were created during the marriage are considered community property, which is also called “marital property.” Any company owned by a spouse prior to marriage could be considered separate property.
When the assets are divided, the other spouse is legally entitled to half the business value that can be divided by spouses either making a mutual agreement, or the family court judge can decide for them.
The mutual agreement option is usually the best route, but not always realistic. In many high-asset business owner divorces in California, the spouses cannot agree on who will receive all or part of the business assets and liabilities during the divorce proceedings.
In other words, divorce and high-asset business ownership frequently get complicated fast, and you will need to retain a divorce lawyer with experience in handling these types of cases.
The actual division of business assets will depend on how long the business has been in operation and whether both spouses were active in the daily operation.
A popular option for business owners getting divorced is to buy out the spouse. Suppose both spouses can agree to a buy out? In that case, the amount usually is higher than half of the business value because the business will continue to earn revenue after the divorce has been finalized.
This means the business's current value and the amount the spouse could have expected to earn later is often the amount requested for a buy-out agreement.
How spouses decide to treat the business can impact their potential child support, spousal support, and their tax status. Our California divorce and family law attorneys will look at this topic further below.
What Business Owners Need to Know When Getting Divorced
If you have decided to file for a divorce, you would be wise to first consult with a California family law lawyer before filing your paperwork.
Many high-asset business owners are concerned that their ex-spouse will lose or control their business. It would help if you had professional legal guidance to understand all your possible options. There is much information to sort through, such as:
- Is your business separate or community property? All marital property in California is divided equally in a marriage settlement agreement, but not all property is considered community property. Any business owned before marriage or inherited by one spouse is considered separate property.
- Did you inherit the family business from your parents? If your business was inherited from your parents, your ex-spouse is not legally entitled to half the business value. However, If you decided to add your spouse's name to the incorporation paperwork, they could be entitled to some of the assets.
- Your business value will need to be determined. Any divorce involving a high-asset business owner means a third party must specify the business value. This usually consists of an accountant reviewing your business records to determine what your business is currently worth and considering future earnings.
- Did you start the business together with your spouse? If you and your spouse were involved in creating the business together, you would have to decide who would keep running the business post-divorce. Again, this makes the business community property, and each spouse is entitled to half the value discussed above.
What is a Business Valuation in a Divorce?
Determining the value of a business in a divorce case is often a complicated task, depending on the size of the company. Accurately calculating the value of a company for dividing assets typically requires the use of a certified public accountant (CPA). It will also require access to the following:
- company financial records,
- cash flow,
- tax returns,
- inventory records, and
- bookkeeping files.
Even if a CPA is retained as an expert to calculate the value of the business, you still need an experienced divorce lawyer who knows how to handle small business valuations.
Spouses getting a divorce are often surprised by the value given to their spouse's business interest in the context of a divorce.
This also applies to sole proprietorships where a self-employed spouse is the only employee. These types of businesses are also found to have significant value in dividing assets. Likewise, California family courts often assign significant values to a spouse's minority interest in a business or partnership.
The models valuation experts commonly use to assign a value to a business can be complicated. There are several primary valuation methodologies that lawyers use to estimate a value for a business, such as:
- market approaches,
The income approach uses the company's anticipated future profits and cash flow to calculate a current value. The income approach to valuing a business is probably the most complex analytical issue under the law but is usually the most favored method of valuing a modern business.
The income approach methodology uses the company's past business performance, such as net profits, to estimate future earnings. The projected future income of the company is then used to calculate its current value.
The market approach attempts to value the business based on comparable sales of similar companies within the same geographic region and period of time.
The asset approach is usually used if the first two methods fail to generate a value, a company has been struggling to create a profit, or if the business holds significantly valuable assets, such as real estate property or expensive heavy equipment.
The capitalization of earnings approach is typically used for stable high-asset companies that generate steady profits now and predicted in the future with stable growth.
Get Help from California Divorce Lawyers
Business arrangements are often complicated, but if you started a business during the marriage, you are entitled to half of the business value.
However, businesses come in all types of structures and revenue levels that require a forensic accountant's services to determine the value of the community property in the company.
Any spouse who shares a stake in a business can work with their spouse post-divorce or sell their share of the company. Business ownership does not have to be automatically a hot topic of debate in divorce proceedings.
This is a broad topic for the self-employed, small business owners, high-value businesses, or professional practices. There could be issues with business owners paying personal expenses through the business or valuing the company with an expert.
Some expenses are deductible for tax purposes but get added back to business owner income for support (e.g., home office deductions, car payments, etc.).
Was the business started before or after marriage? Do both spouses work together in the business? Does one spouse have a professional license for the company? If so, they will be awarded the business, but they may have to pay the other spouse for their share of the community interest.
If you are concerned that your spouse can control your business assets, you better prepare before filing for your divorce. You should gather documentation about the primary business owner and allow an expert to come in and assess your company for the family court. We are often asked can you sell the business during a divorce? How can you keep a divorce out of the family business?
Furman and Zavatsky and California divorce and family law lawyers based in Los Angeles County. Our firm offers a free case evaluation at (818) 528-3471 or use the contact form.