Most Californians understand that property in a divorce must be divided according to the rules of community property. According to the general rule of community property, the net value of marital assets must be divided equally between the divorcing spouses.
Although simply stated, the rules of community property can be difficult to apply in specific situations. Among the most difficult of such situations is dividing a family business. The difficulty arises because businesses come in an almost endless variety of shapes and sizes.
Is the business individual or community property?
The first step in dividing a business in a California divorce is to determine whether the business is marital or individual property.
- If the business was founded by one spouse before the marriage, the business will most likely be determined to be an individual asset.
- If the business was founded by both spouses after the marriage, it will most likely be found to be a marital asset.
- If the business was founded by a single spouse but gained significant value though the efforts of both spouses, the court is most likely to rule that a significant portion of the business is marital property.
Valuing the business
Any one of several methods can be used to value a business.
- The simplest – but often least accurate – method is the net asset value: the company’s debts are subtracted from the total value of the company’s assets, and the remainder is the company’s value.
- Another method is to estimate the income of the business over a fixed time period and to calculate the present value of the income as of the date of the divorce.
- A third method, called the comparable sales method, is examining recent sales data for similar businesses and using this data comparison to estimate the fair market value of the subject business.
- If the business is large or very successful, the divorcing couple may decide to hire a professional appraiser to provide an unbiased estimate of the company’s fair market value.
Other valuation methods are sometimes used, but the ones mentioned above are the most commonly used.
Dividing the business
After determining the fair market value of the business, the spouses have several choices. They may decide to sell the business to a third party and divide the proceeds of the sale equally between them. A second alternative is to convey the entire business to one spouse and adjust the division of the remaining assets accordingly.
This alternative may have the unwanted effect of depriving one spouse of a good-paying job, an outcome which may affect the determination of either spousal or child support. A third option depends upon the ability of the divorcing spouses to work together after the divorce is final. If the two individuals can get along, they may be able to continue their co-ownership without selling the company.
Dividing a family business can have important impacts on other issues in the divorce, and these issues should be addressed before the company is sold.