Dividing a Family Business in a California Divorce

It’s a rare post-divorce couple that can continue to run a business together, causing divorcing couples with family businesses to be quite contentious. Family businesses are difficult to value and rarely have “market value” when sold to a third party. When a couple cannot decide how to divide a business, the courts will impose a decision. If you are a business owner seeking divorce, it’s important to consult with an experienced and aggressive Marin County divorce attorney to protect your business during the divorce.

Community Property and The Family Business
California is a “community property” state. This means that, in the absence of an agreement, the property and/or debts acquired during a California marriage are divided equally. In order to be exempt from distribution to the other spouse, the property must meet the criteria as “separate property,” which was either acquired before the marriage, during the marriage as a gift or inheritance or purchased exclusively with profits derived from separate property.

Family Businesses Are Difficult to Categorize
A common scenario is a business started by one spouse prior to the marriage. This scenario creates both community and separate property components. Control of the business would likely be awarded to the original owner spouse, but the other spouse may be entitled to a community property award for the appreciation of the business that occurred during the marriage.

How is Appreciation Determined?
Appreciation from the efforts and skill of a spouse during the marriage is community property that will be divided. For example, if you owned a business prior to the marriage, but your spouse worked as a designer that developed profitable products that caused the business to flourish, that appreciation would be community property. On the other hand, if the business appreciated purely due to “market forces” such as rental real estate in an improving neighborhood, that would remain separate property.

What is the Business Worth?
Family businesses are difficult to assess as much of the value is in the form of “good will” which is tied to the owners and operators of the business. For example, a pottery business would have little to no value without the artist that’s been making the pottery, but there may be a large inventory that has value. The court will usually order an independent business evaluator to determine the value of the business at the time of the marriage and at a later date - either at the commencement of the divorce proceeding, the separation of the couple or another relevant date.

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