Who Gets the Business After a Divorce?

A divorce can be a difficult process that is even more complicated when the divorcing couple owns a business together. When it’s time to divide assets, the business will certainly make up part of the couple’s total wealth and become a key asset in the dissolution process. But when both parties feel like they’ve put their blood, sweat, and tears into the business, how do you decide who gets to keep it? Does one or the other party necessarily need to?

If you’re a divorcing couple that built a business together, you should contact an Irvine divorce attorney to explore your options. Generally speaking, couples who wish to end their marriage and have a business to deal with have to choose one of three options: either one spouse buys out the other, they sell the business, or they remain co-owners.

Buying Your Spouse Out of a Business

The most popular choice for dealing with a business in a divorce is generally to buy the other spouse out and maintain controlling interests in the business. This is not always possible in businesses where a license is required, such as a medical or law practice, if you don’t have a license to practice and thereby own that business. 

To buy out the business, the parties would need to have the business appraised to determine its fair market value. Once that’s been assessed, one party would agree to purchase the business for half its value.

Selling the Business

Sometimes spouses do not have enough cash on hand to buy one of them out of a business, particularly if the divorce is going to get costly. In that case, spouses may be forced to sell the business and divide the profits down the middle. This is often a common solution, though rarely preferred, as most couples usually want to keep some stake in a thriving business. This option might have some challenges, as it will depend vastly on the company’s profitability and marketability as to whether it will sell for the desired sum. Should everything go as the couple wishes, however, then the company would be sold, and they would divide its assets equally.

You Could Choose to Remain Co-Owners

While this is certainly the rarest option for couples who are getting a divorce, some may be amicable enough to decide to remain co-owners of the business. Whether or not that means they are actually working together from day-to-day can be decided by the parties. For example, one spouse could maintain responsibility for the functioning of the business and allow the other spouse to retain an ownership stake and a salary or dividend pay-out so they can reap certain benefits from the business. 

Contact an Irvine Divorce Attorney to Weigh Your Options

If you’re the co-owner of a business with a spouse you no longer wish to be married to, you should consider all of your options with the assistance of an Irvine divorce attorney. Contact our offices today.

Frequently Asked Questions

Who keeps the business when a married couple divorces in California?

Ordinarily the spouse who runs it. California requires an equal division of the net community estate, not of each individual asset, so a business is awarded whole to the operating spouse with the other spouse receiving offsetting value from other assets or a payment over time. Courts avoid ordering two former spouses to remain co-owners, and they avoid forced sales where an offset is workable. The real dispute is therefore almost never who keeps the company; it is what the company is worth and how the offset gets funded.

Is a business started before the marriage still separate property?

Its original value generally is, but the increase in value during marriage may not be. Where a spouse devotes labor during the marriage to a separate-property business, the portion of the growth attributable to that community effort belongs to the community, while growth attributable to the capital itself remains separate. California applies two competing apportionment methods depending on whether the growth was driven mainly by the owner’s efforts or mainly by the character of the investment, and which method applies can move the number substantially.

How is the value of a closely held business determined?

By a forensic accountant, and the fight is over the inputs rather than the arithmetic. The recurring issues are what the business really earns once the owner’s compensation is normalized to a market salary, which expenses running through the company are personal, whether the earnings are sustainable or reflect one strong year, how much of the value is goodwill tied to the enterprise as opposed to the owner personally, and whether, and to what extent, discounts for lack of marketability apply. A buy-sell formula among the owners is evidence but does not bind the court.

How does the other spouse actually get paid?

That is usually the hardest term to negotiate, because a concentrated estate rarely holds enough liquidity to fund a large equalizing payment at judgment. The workable structures are an offset against other assets such as the residence or retirement accounts, a promissory note paid over years and secured by the business or other property, a payment schedule tied to the company’s actual distributions rather than a fixed calendar, or a contingent payment triggered by a future sale. Whichever is used, the judgment should include security and a remedy for nonpayment.