Dividing a business or partnership interest during a high-net-worth divorce is one of the most complex issues that can come up in a California family law case. Unlike a bank account that has a clear balance, a business doesn’t come with a simple price tag. Instead, its value has to be determined through a formal process upheld by family courts in the state.
Further, since California is a community property state, anything acquired during the marriage is generally split equally between both spouses. That includes business interests. However, figuring out what a business is actually worth and how much of that value is subject to property division isn’t always straightforward. Read on to learn more about how courts approach this issue.
Community Property and Business Interests
Property acquired during a marriage is presumed to be community property under California Family Code Section 760. That means if you or your spouse started a business or acquired a partnership interest while married, the community likely has a claim to it.
Things become more complicated when a business existed before the marriage but grew in value during it. In that situation, the original investment may be considered separate property. However, the increase in value could be at least partly community property depending on what drove that growth. The same applies to partnership interests in some contexts.
How Courts Determine the Value of a Business
Before any business can be divided, the court needs to know what it’s worth. California Family Code Section 2552 directs courts to determine the fair market value of community assets as accurately as possible.
These professionals typically rely on one or more of the following approaches:
- Market approach: Compares the business to similar companies that have recently sold
- Income approach: Projects future cash flow and discounts it back to present value
- Asset approach: Calculates worth based on the company’s tangible and intangible assets, including goodwill
The method that is used often depends on the nature of the business itself. Each spouse may hire their own expert as well in contested divorce cases, potentially leading to a dispute in terms of competing valuations.
Separating Community and Separate Property Interests
In cases where a business existed before the marriage, the court will still need to figure out how much of its growth belongs to the community.
California courts use two formulas for this:
- Pereira: Courts apply this when the business grew mainly because of one spouse’s hands-on work. The original investment gets a fair rate of return, and everything above that is treated as community property.
- Van Camp: This applies when outside forces drove the growth rather than one spouse’s labor. The working spouse is assigned a reasonable salary, and the remaining value stays separate property.
Which formula is applied can dramatically shift what each spouse walks away with, so experienced legal guidance on this issue is a practical necessity.
What You Should Do if a Business Is Part of Your Divorce
If a business is involved in your divorce in California, there are some important steps you can take early to protect your rights.
These include:
- Gather financial records, tax returns, and any partnership agreements as soon as possible
- Request a professional business valuation from a qualified expert
- Work with an attorney who has experience handling high-asset divorces in California
- Be prepared for disputes over what qualifies as separate versus community property
Getting organized early on puts you in a much better position, legally speaking, when it’s time to resolve your case.
Schedule a Consultation With an Experienced California Divorce Lawyer at Berenji Divorce & Family Law Group
Failing to properly value your business in a California divorce case can cost you significantly. Ultimately, the best way to protect your rights and interests is to hire an experienced divorce lawyer who has successfully handled cases like yours before.
Contact an attorney today at Berenji Divorce & Family Law Group to get started with an initial consultation. You’ll be able to ask any questions you might have at that time, as well as receive some preliminary legal guidance.
We serve throughout California: Los Angeles, Beverly Hills, Los Angeles County, and its surrounding areas. Visit any of our offices at:
Berenji Divorce & Family Law Group Los Angeles Office
550 S. Hill Street STE 1467
Los Angeles, CA 90013
(213) 277-2586
Berenji Divorce & Family Law Group Beverly Hills Office
9465 Wilshire Blvd #333
Beverly Hills, CA 90212
(213) 277-2586
