It’s not only how your business valuation is established in a divorce but when. In California, as a community property state any business ownership interest acquired during the marriage or supported with marital funds is considered in part or whole as community property. Community property must be divided equally among the former spouses during a divorce. One of the most challenging aspects of a divorce in California is the disposition of a business or professional practice.
Generally speaking, a valuation for the business or professional practice must be established. The next step is to determine the community’s interest in the valuation of the business. If a business owner wants to keep their business interest in a divorce they must usually offset their former spouse’s community interest in the company. This may involve a monetary settlement, offsetting the value from other community property and/or some form of agreement to pay off part or all of the spouse’s community property interest.
A recent appellate case demonstrates the reason its not only how your business valuation is established in divorce but when. In this case the husband (who owned a business) sensed a divorce may be imminent. He started to transfer money and assets to another business which he controlled and managed. By the time of the divorce, one appraiser put the value of the company at only $47,000. The trail court recognized the actions of the husband based upon forensic accounting provided by his former spouse and selected a date for the valuation which was two years prior to the divorce. The ultimate valuation from that date was $470,000.
The Second District Court of Appeals confirmed the trial court had not abused its discretion in setting the valuation date of the business two years prior to the actual divorce. Although California law generally requires a valuation closer to the actual date of divorce, the most important issue to is establish an equitable division of the community interest in the business. This, according to the 2nd District, provided ample reasoning for setting the valuation date two years earlier.
If you or your spouse own a business or professional practice and are concerned about how this asset will be handled in a divorce we invite you to contact the Certified Specialists at Burke and Domercq or call 760-434-3330 to schedule an appointment to learn more.