California is a community property divorce state where the court considers all assets and debts accumulated during the marriage as marital property subject to 50/50 distribution regardless of whose name is on the account or property. Only those assets and debts belonging to a spouse or inherited before marriage remain an individual’s separate property during a divorce—and then only if the asset or debt didn’t comingle through the other spouse’s access to the asset or investment of money or time into improving the asset. As if this isn’t complex enough to untangle in a divorce, for divorcing spouses who own one or more businesses, it becomes even more complicated. When a business is involved, it’s important to accurately value its tangible and intangible properties and assets and liabilities before tackling equal division. A San Francisco complex property division attorney can help.
How Does Determining A Business Value Work During Divorce?
The courts in California seek to assign a value to an asset like a business before determining how to distribute it fairly. It’s essential to have an accurate picture of the value of a business before beginning negotiations for a divorce settlement agreement. Often, divorcing spouses with businesses hire financial experts in addition to their divorce attorneys to assist in accurately valuing a business. Valuing a business involves accurately assessing its tangible property such as:
- Equipment, and
- Bank accounts
After getting a full assessment of a business’s tangible assets, it’s necessary to assess its liabilities as well. These may include:
- Business loans
- Other debts owed in money, goods, or services
By subtracting the total of the liabilities from the total assets of the business, it forms a starting value for the business. The next step is determining what an outside buyer would likely pay for the business by looking at the income of the business as well as its assets over the previous five years and then estimating its future value over the next 5 years. This is known as the business’s fair market value.
Timing the Valuing of Your Business During a California Divorce
It’s important not to overlook the critical timing of your business valuation. While it may seem like something you should do as soon as divorce becomes inevitable, assessing the business’s value too soon can be a mistake. In high-asset or complex divorce cases, it may take many months to work through the process before the final hearing. In some cases, a preemptive valuation of the business may no longer be accurate. It’s best to have the business valuation completed close to the hearing date so it remains accurate when you and your attorney present it to the judge.
What Happens to a Business During a Divorce in California?
In California, a spouse is entitled to half of the value of any business begun during the marriage, making an accurate assessment of the business’s fair market value—or fair value, depending on the preference of the jurisdiction—essential to protect each spouse’s interests. Negotiations for the fair distribution of a business as a marital asset often become contentious. The spouse who ran the business typically feels they’ve worked too hard to give away half of the business’s value to a spouse, while the spouse may feel like they’ve earned their half due to the sacrifices they made to support the business.
In California, a spouse isn’t necessarily the half-owner of the business, but they do own half of the business’s value under the state’s community property laws. This means one spouse may buy out the other spouse’s share in order to continue operating the business or they can agree to sell the business and split the profits evenly. It’s almost always better to reach a mutual decision with a spouse rather than leave the decision in the hands of the judge. Accurately valuing a business is a critical step in the process.