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Preserving business interests during divorce

On Behalf of | Jul 26, 2021 | Divorce, Property Division

Divorce creates tremendous emotional upheaval for everyone, which often clouds the more pragmatic issues that each spouse must face when ending the marriage and setting a course for the future. For the California business owner, layers of complexity may arise during property division that can put the enterprise at risk, especially if there are claims on it or its related assets.

As the business is often the most valuable asset in the household, whether one spouse is owner, partner or majority shareholder, dividing it up in a divorce proceeding can have serious consequences. It is important that they anticipate potential entanglements and be prepared to address them in order to keep the entity’s future viability.

Business owners in Los Angeles and throughout Southern California and can benefit from experienced legal counsel to help them to effectively prioritize their financial concerns during divorce.

Evaluating the business

As California is a community property state, any property that either party has acquired, or debt incurred, during marriage will be subject to equal division in divorce. As this applies to business interests, the court may consider any increase in value of the business during the marriage as community property unless there is a pre- or postnuptial agreement limiting the commingling of assets.

When it comes to assessing the value of a business during property division, the valuation method as well as the business’s organizational structure can affect the outcome. There are three basic ways of determining business valuations:

  • Assets against liabilities, which can be complicated for small businesses when considering large expenditures such as vehicles, computers, or office equipment
  • Market-based analysis, which provides data on similar businesses that have been bought or sold to determine market value, is the least often used method for small to mid-sized businesses
  • Revenue-based valuation, both past and projected, is the most common approach, and focuses on cash flow and profits to determine future value, including proceeds from investments

How business structure affects valuation

The structure of the business can also influence how the court treats its division in a divorce proceeding. In a sole proprietorship, the business is split evenly between the two spouses. The laws of the state in which a limited liability company functions will determine its valuation. And for a corporation with shareholders receiving dividends, these assets will potentially factor into the valuation.

The stakes are high when it comes to determining the value of the business, so each spouse may hire a professional to conduct a valuation. If a hearing occurs as part of the divorce proceeding, completing the valuation as close to the hearing date as possible will ensure its accuracy.