How Is a Business Interest Valued in a California Divorce?

For those going through a divorce or contemplating one, a common concern is how a business interest will be treated by the court. Sometimes, both spouses own a business together. Other times, however, only one spouse has an ownership interest in a business.

By law, California courts must make a substantially equal division of community-owned property. Therefore, the first step in deciding how to deal with a business ownership interest is to determine whether it is separate or community property. It may even be a little of both. If you are not familiar with basic property law in California divorces, please see our separate blog here.

If the couple started the business together and operated it together, the court will likely decide it is a community-owned asset. However, often, business ownership is not so clear. For example, sometimes, a business was started before the couple married. Other times, although one spouse may be the owner “on paper”, the other may have worked in the business and contributed substantial value to it. In more complicated cases such as these, the court will need to decide issues such as the value of the business at the time of marriage and the present, the value of spousal contributions to the business, and other difficult factual questions.

It is usually necessary, in these cases, to retain a forensic accountant. Forensic accountants are trained in both accounting and investigative techniques. For this reason, they can be invaluable partners in determining the value of a business and in presenting their valuations to a court.

Forensic accountants are experts at detecting irregularities in company records. Their findings can help demonstrate, for instance, if one spouse has altered company records to make it look like a business is more or less profitable than it really is. Ultimately, the accountant will give an expert opinion about the value of the business. One of three methods is typically used:

• the income approach, which attempts to value future economic benefits;
• the market approach, which compares the business to others that have recently been sold; and
• the asset approach, which compares the relative assets of the business to its liabilities.

If the parties do not agree about how to divide a business ownership interest, the court will divide it for them, keeping in mind that their community property must be divided substantially equally. How this takes place is within the court’s discretion. Options available to it include awarding the business to the spouse who plays the greatest role in its operation, awarding it to the other spouse, dividing the stock ownership among the parties, and ordering the sale of the business.

Business ownership interests are among the more difficult issues that arise in family law, and how they are handled can affect the parties for the rest of their lives. The attorneys at The Law Offices of Judy L. Burger have extensive experience in all matters relating to property division, including dealing with business interests and forensic accounting. Make the call today to learn how our attorneys can protect your financial future: (415) 293-8314.