California Family Code (FAM) § 2550 states that, when couples divide community property during divorce, they should do so “equally.” To divide property equally, you need to know what each asset is worth. Businesses and business-related assets are often difficult to appraise but high in potential value, both subjective and objective. As a result, business valuation in divorce can have a crucial impact on the final distribution of property and which spouse receives which assets.

This guide explores business valuation in divorce in California, from practical concerns to legal principles. Most couples pursue settlement, and business valuation—subjective and objective—can play a critical role in negotiations. The Stratte Firm has guided many couples through complex business valuation and property division. We offer insights about that process and the importance of collaboration and dialogue.

Property Division Under California Law

Under California FAM § 760, spouses become a “community” when they marry. The community, the marital estate, is the joint legal entity of the couple. When either spouse acquires property during the marriage, the community owns it—unless it falls under what the law defines as separate property.

Community vs. Separate Property

Separate property is not subject to division. FAM § 770 states that separate property includes property that either spouse obtained:

  • Before the marriage,
  • After separation,
  • Through inheritance, or
  • Gift.

Some property may have aspects of both, like separate property commingled with community property and separate property of one spouse that the other improves. Business interests are subject to the same general rules, and under FAM § 910, similar standards apply to debts.

Start and End of the Community

Determining when the marital community starts is typically as simple as identifying the date of marriage. However, some couples, like same-sex couples who have been together through years of legal changes to the law’s recognition of their relationship, may need to rely on practicality to determine when the community started. For example, they may identify the date they moved in together as the start of the community.

Deciding when the community ends can be more complicated. According to FAM § 771, generally, the community ends on the date of separation, where separation reflects at least one spouse’s genuine intention to divorce. Determining the exact date can be challenging when spouses disagree.

Negotiation and Mediation

While the law requires courts to divide property equally, it also directs courts to approve jointly proposed property division agreements in most circumstances. Many couples opt for a settlement. In that process, the law acts as a guide but not a compulsion.

Negotiation and mediation allow you to create a collaborative solution. You can leverage expert opinions, reach compromises, and understand more about what matters most to you and your future former spouse.

How Is a Business Valued in a Divorce?

FAM § 2552 directs California courts to determine the fair market value of each community asset as accurately as reasonably possible. Aspects that influence how a business is valued in a divorce include:

  • The business structure;
  • The Spouse’s role in the business;
  • The business assets, separately and as a whole;
  • Elements contributing to the business value;
  • The value each spouse places on the business; and
  • The valuation method used.

By understanding where you stand on each of these, you can be better prepared to collaborate.

Business Structure

A business’s structure influences:

  • Who else might be affected by the asset division in divorce,
  • Whether you need to negotiate with more people than your spouse,
  • A spouse’s right and ability to transfer ownership interests, and
  • The financial and tax implications of division.

Common business structures include:

  • Sole proprietorship—single owner and a business entity that is not legally distinct for tax purposes;
  • Partnership—governed by a partnership agreement and owned by two or more partners, partners pay income taxes on their earnings;
  • Limited liability company (LLC)—owned by one or more members who pay income tax on earnings;
  • S corporation—owned by a limited number of shareholders who pay income tax on earnings; and
  • C corporation—owned by an unlimited number of shareholders, but the corporation itself pays corporate tax.

Each spouse’s role—for example, shareholder versus founder, sole owner versus partner—impacts how they approach the negotiating table.

Business Assets

Businesses typically have tangible and intangible assets. Tangible assets include things like:

  • Real estate,
  • Equipment,
  • Goods,
  • Inventory,
  • Vehicles, and
  • Bank accounts.

Intangible assets, on the other hand, include harder-to-define things like:

  • Trademarks,
  • Patents,
  • Copyright,
  • Goodwill,
  • Reputation, and
  • Trade names.

These assets can prove more complicated to appraise than their tangible counterparts.

Source of Business Value

One of the most obvious sources of a business’s value is its revenue and profitability. Yet, many factors can impact why the business is valuable, such as:

  • Market conditions and environmental impacts,
  • Location and community potential,
  • Brand value and recognition,
  • Growth potential,
  • Enthusiasm of owners and the community, and
  • Organizational clarity.

Especially in divorce, where each spouse might assign a different subjective value to the business, considering what other factors might influence a subjective understanding of value can provide unique insights.

Role in the Business

While spouses share business interests obtained during the marriage as community property, their roles in the business can vary significantly. One spouse may run the business while the other plays no role, or both might be co-owners. More likely, they fall somewhere in between. These concrete differences might affect not only the subjective value the spouse assigns to the business, but also the degree to which each spouse understands the business. Negotiation becomes essential when one spouse does not understand the business or the value the other spouse places on it.

Value to the Individual

Depending on their history of involvement with the business and vision for its future, each spouse may have a different subjective appraisal of the business. For example, one spouse may see specific value in:

  • The history of the business’s founding,
  • Business ties to family or friends,
  • Designs or images used in the business,
  • The community around the business,
  • Customer relationships, or
  • The business’s potential to help others.

These subjective values often inform negotiation and mediation.

Valuation Methods

Given the diverse array of valuable aspects of a business, it may not surprise you that experts use many different business valuation methods. These methods vary by business structure, ownership percentages, and how long the business has been operating.

Income 

Income-based methods focus on the company’s past performance, using indicators like net profits and cash flow. By projecting the business’s future earnings, valuators offer the fair market value of the business at the time of divorce. Appraisers use different methods, including capitalization and discounting of cash flow, based on how much a business’s income fluctuates over time and how likely it is to fluctuate in the future.

Market

The market method focuses on the business’s market value, should it be sold. Valuators consider indicators like recent sales of comparable businesses, competitor performance, and geographic area. This method resembles real estate appraisal.

Asset

Also called the adjusted net asset method, the asset method calculates value using indicators like the fair market value of assets and debts. Valuators typically turn to this method only when market and income methods fail to reach reliable results. This method requires a thorough, detailed analysis of many different types of assets, including intangible ones.

These methods seek to calculate objective value and form a crucial underpinning for negotiations and collaborative divorce. Ultimately, determining the objective value of relatively new businesses with less data to pull from can only be one part of the story in asset division in divorce.

The Impact of Business Valuation on Divorce in California

Divorce business valuation proves unique among most exchanges of business interests. The value of subjectivity, the individual’s specific connection to the particular business, plays a critical role in determining value as a whole. When you engage in collaborative divorce processes, you can factor in subjective value much more easily than if you go to court.

Role in Negotiation and Mediation

By working with a divorce attorney with experience guiding you toward determining the business’s subjective and objective values, you can more effectively negotiate toward a settlement. You can find a balance between objective and subjective value, allowing you to retain important assets. Ideally, your former partner does the same, leading to an equitable outcome.

Role if You Go to Court

If you and your partner cannot reach a settlement, a judge has to decide how to divide your community estate. Going to court can be necessary, but it brings extra costs, time, and stress. Plus, the judge must rely on the law. They cannot offer the same flexibility as collaborative divorce. Court-decided division relies primarily on objective valuation methods and what the spouses can prove in court.

Subjective and Objective Value

In business valuation and property division, a divorce attorney can help spouses weave objective and subjective value together to arrive at a collaborative, law-guided resolution. Moving toward collaborative divorce means each individual can express and, hopefully, keep what matters most.

The Stratte Firm can help if you navigate business valuation, property division, and divorce with compassion and clarity. We understand how to protect what is important to you, personally and financially, and we are ready to guide you forward.

Resources:

California Family Code § 760, link.

California Family Code § 770, link.

California Family Code § 771, link.

California Family Code § 910, link.

California Family Code § 2550, link.

California Family Code § 2552, link.