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 § 770.
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 proceedings.
Contact Hanson, Gorian, Bradford & Hanich at (951) 506-6654 to schedule a free case evaluation exploring your legal rights today.