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What Happens When a Business Asset in a Divorce is Losing Money?

On Behalf of | May 28, 2019 | Divorce

What happens when a business asset in a divorce is losing money?  In a North County San Diego divorce all assets of the parties must be divided according to California’s community property laws.  This includes the ownership interests in a business or professional practice.

Normally, the business would undergo an independent “valuation” to establish the value of the community’s ownership interest in the company or business.  Once the valuation of the interest is established, the Court establishes the spousal interest in that business.

For example, if the wife owns an interior design business valued at $500,000 (and the business was formed or gained the $500,000 value during the course of the marriage) the husband would most often be entitled to half of the value of that business or $250,000 as part of the community property settlement.

What happens when a business asset in a divorce is losing money?  California family law has clearly established that it is possible for an operational business to have no value.  In the example above, if the wife could establish through the presentation of evidence that her business was in fact losing money or unprofitable, the Court may order that the valuation of the business is zero.
The business could be awarded in full to the wife without any offsetting value awarded to the husband.  It is important to note the issue of profitability or operational income in this example is a separate issue from “goodwill.”

Goodwill is basically defined as the impact of the services of the spouse who owns the business interest upon the viability of the business itself.  In other words, Goodwill is the expectation of ongoing sales or income for the business is based upon the specific reputation or customer relationships associated with the owner.  “If I’m not running the company, there is no company.”

Goodwill can have a tremendous impact on the valuation of a company in a North County San Diego divorce.  It is also one of the most difficult aspects to value in the process of a divorce and property distribution discussion.  This is why it is so important to work a divorce attorney with extensive experience and expertise when approaching a divorce involving a business interest as either the spouse who owns the business, or the spouse of the business owner.