Most people understand that spouses must
divide their assets upon getting a divorce, including real estate, cars, money, and investment
accounts. The process of distributing those assets is relatively straight
forward because most marriages commonly involve that kind of property.
However, dividing interests in a business can be complicated, requiring
sophisticated accounting methods to appraise the value of a business.
Characterizing a Business as Community or Separate Property
In addition to property such as real estate, personal property, and financial
accounts, California’s rules regarding community property also apply
to business interests. Accordingly, business interests acquired during
marriage are included in the marital community estate. If a party wishes
to characterize a business interest as their separate property, they must
submit sufficient evidence proving that the business interest falls under
an exception to the community property rule under California Family Code
The dynamics of business ownership make characterizing business interests
a challenging and complicated task. A business is not a static asset like
a car or family heirloom. The evolution of a business can cause it to
increase or decrease in value over time. Furthermore, business growth
can be attributed to the efforts of both spouses. As a result, one can
essentially acquire an interest in the separate property business of their
spouse by contributing community property resources to its growth. In
such cases, the growth attributed to the use of community property resources
may be characterized as part of the marital community estate.
Valuation Approaches for Business Interests
A business interest that is characterized as community property will be
equally divided between the parties upon divorce. Whether the marital
community has an interest in specific business assets or the overall growth
in a business’ value, each party is entitled to an equal share of
any aspect of a business deemed to be community property. The party who
wishes to retain ownership of the business to continue its operations
will “buy out” their spouse’s interest for property
division purposes in a divorce.
Business valuations are not restricted to a single method. The value of
a business can be connected to various factors, including the market value
of its assets and liabilities, its potential future cash flows, and the
market demand for the business’ services or products. Some valuation
methods can lead to a lower value than other methods. Deciding on an appropriate
valuation method may depend on the specific interests each party wishes
to claim over a business. For instance, a party claiming a community property
interest in their spouse’s separate property business will want
to argue for using a valuation method that maximizes the business’ value.
Importantly, there is a time element to business valuations. Because the
marital community’s interest in a business depends on when the marriage
started and when the parties separated, a comprehensive business valuation
should account for the present or future values of its assets or growth,
limited to the period during which the parties were living together as
a married couple.
Given the complexities associated with business valuations, hiring forensic
accounting specialists and Certified Public Accountants is often necessary
to handle such matters. Furthermore, it is highly recommended that any
party to a divorce involving high-value assets retains an attorney with
experience in business valuation issues for purposes of dividing property
upon their client’s divorce.
Consult a Dedicated Attorney from Hanson, Gorian, Bradford & Hanich
Does your divorce involve complex financial issues and
high-value assets such as a family business? If so, you should consult a dedicated attorney
from the legal team at Hanson, Gorian, Bradford & Hanich. We have
valuable experience in divorce matters such as property division and business
valuations. You can benefit from our connections to reputable financial
professionals who can support your financial claims during your divorce
Contact Hanson, Gorian, Bradford & Hanich at (951) 687-6003 to
schedule a free case evaluation exploring your legal rights today.