In California, during divorce, community property and assets are usually divided 50/50. Navigating the complexities of a divorce involving a family-owned business in California requires careful consideration of community and separate property, valuation processes, protective measures, and various options for the future of the business.
Community VS Separate Property
In California divorces, community property is split while you get to keep your own separate property. Determining whether the business is considered community or separate property is crucial. What makes a business a community or separate property?
Any assets and debts that are acquired during the marriage.
Even if the business was initiated before the marriage, it can still be categorized as community property due to the contributions and benefits received during the relationship. This is because the assets accrued from the business during the marriage played a part of how the couple lived their lives together during their marriage.
Any assets and debts that were acquired before the marriage, or were obtained as a gift or inheritance. These may also be protected by a prenuptial agreement.
A business can be considered separate property if you never mixed your spouse into the business, but the increase in value of your business during the marriage is considered community property.
Valuing the Family Business
Getting your business valued is important when determining a fair division of all community assets during a divorce. Usually people hire forensic accountants to determine the business’ value. This process helps establish a comprehensive understanding of the business’s worth, facilitating a more equitable division during divorce proceedings.
Businesses can be valued with the following methods:
- Asset approach: Business liability is subtracted from total assets
- Market approach: Comparing similarly sized businesses within the same industry with the couple’s business.
- Income approach: Estimated net income and performance.
Other factors considered:
- Size of the business: Larger businesses have higher value.
- Industry: Tech and healthcare have higher value.
- Profitability level: Higher profit means higher value.
- Debt level: More debt means less value.
- Age of business: Older businesses have less value.
- Growth potential: High growth potential means higher value.
A business is valued through many different factors, with no one causing high valuation than the other. All factors as a collective determine its value.
Protecting the Family Business
Before marriage, outline the rights of the business in a prenup agreement, to protect business ownership in the event of a divorce. During divorce, outline the rights of the business in a postnuptial agreement, to protect business ownership during the divorce process.
Any proprietary information, trade secrets, and client/customer lists can be protected from being shared and disclosed to anybody unauthorized during the divorce.
In your employment agreements, having a restrictive covenant can prevent your ex from becoming a competitor or soliciting current clients or employees.
Options for the Business During Divorce
Options for the business during divorce provide flexibility for spouses seeking an amicable resolution.
One spouse can “buyout” the other spouse’s interest in the business. Essentially it is purchasing the half of the business from the other spouse. This is done through a fair price, and way of payment.
Some ex-spouses may determine that even after the divorce, they will continue to run the business together. This may be difficult, but with lots of communication, cooperation, and an agreement on how the business will be run, will help. Have your agreement outline management responsibilities, decision making, as well as how profit will be split.
Sale of the Business:
If keeping the business is impractical or neither spouse wants to continue it, they can choose to sell the business and then divide the sale proceeds.
Many divorced partners find co-ownership difficult, so many tend to choose the other two options, a business buyout or complete sale.
Legal Assistance From a Divorce Attorney
To ensure that assets are divided fairly, many people going through a divorce opt to hire a Newport Beach high asset divorce attorney. These lawyers can help you navigate the distribution of marital assets through their legal and financial expertise, ultimately protecting you and your assets through a fair and equitable resolution.