Family Businesses and Divorce / by Cassandra Hearn

Family businesses are a backbone of the United States Economy, and generate over half of the United States Gross National Product. Division of family business is a central issue for any divorcing couple who owns a business, and there are many questions surrounding how the business will be divided.

 First, it must be determined if the business is community property or separate property. If the business was started during the marriage, it is almost certainly community property and may be divided equally. Dividing a business is not as simple, however, as dividing so many other assets. Even a small business has many different working parts which may include inventory, accounts receivable, real property, goodwill, or even intellectual property. If the parties cannot come to an agreement on how much the business is worth, it will be necessary to hire a professional evaluator to determine the worth of the business. The professional will take into account many factors including industry standards, as well as the business’s assets and liabilities, before coming to a conclusion about how much the business is actually worth. What happens next will depend largely on the nature of the business. For example, if the business is a medical practice with one spouse as a doctor and the other spouse as an office manager, the court will have to decide if one spouse should be awarded the business, if one spouse should buy the other out, or it may be more practical to sell the business and allow the parties to divide the proceeds. If one spouse wants to continue to run the business, it may be possible to buy out the other spouse. If there is insufficient liquid capital to pay in cash, it could be that the buying spouse gives the other spouse a larger share of other marital assets as an offset in order to result in each party receiving half of the marital estate.

 If the business was started before the marriage, it will be separate property. However, this does not mean that the non-owning spouse is simply out of luck. The increase in value of the business that occurred during the marriage may very well be marital property and subject to division. There are two seminal cases in this regard: Pereira and Van Camp.  An analysis under either case will depend largely on how the business was treated during the marriage and whether the non-owning spouse made any active contributions to the business.

 If you have a family business and are facing divorce, call us today at 619-800-0384. We can talk with you about your options and your business and help you to design a strategy.