Valuation & Division of Property & Business
Attorney in Sacramento, California

Generally, when it comes to divorce, states fall into two categories: those whose laws favor an equitable distribution of assets and those whose laws are based on community property, which most people usually view as a 50/50 split. California is a community property state, and if a division is left in the hands of a judge, the split will start as 50/50 for both debts and assets, but other factors may skew the result. 

In a divorce, California recognizes two types of assets and debts: separate and community. Community debts and assets are those acquired by either party during the time of marriage.  

The start is easy to pinpoint in computing the length of the marriage (dating from the marriage vows), but the end of the community property era can be harder to figure out. Basically, the community property – or time of marriage – period ends when the couple separates. Dating the separation, however, can prove tricky as each spouse may make different claims depending upon how they personally benefit. 

Separate property is anything either spouse obtained before the marriage or after separation. Separate property can also accrue from an inheritance or gift during the marriage.  

Separate property, however, can become commingled during the marriage period. Say one spouse owns a rental unit before marriage, making it separate property, but then during marriage uses joint funds to finance repairs on the structure. Part of the unit can now become community property, or commingled. Again, this can prove tricky to calculate. 

The same standards apply if one spouse owns a business; it can be separate, community, or commingled. If both spouses co-own the business, then it is community property, but upon divorce, it must be somehow split, unless the couple agrees to continue operating it together.  

When the business is split, one spouse can buy out the other, or it can be sold and the proceeds divided. In any case, the business will have to undergo a recognized valuation process. 

If you are contemplating divorce or have been served papers in or around Sacramento, California, and a business is involved, contact me immediately at The Abdallah Law, A.P.C.. My practice is solely dedicated to family law, and I will work with you to seek the best possible result for you and your business as your divorce proceeds forward. 

The Abdallah Law, A.P.C. also proudly serves clients throughout Placer County, San Joaquin County, Eldorado County, Yolo County, Solano County, and Alameda County.

Valuation of a Business 

If you, your spouse, or both of you own a business and you are divorcing, one of the first steps is to determine whether the business is separate, community, or commingled property. Whatever the outcome of that assessment is, however, the business’s value will have to be determined. Business valuation is generally determined by one of three different methods or sometimes through a combination: 

• INCOME VALUATION: Though there are different methods used to arrive at an income valuation, the bottom line is that it is profit-and-loss based. The valuation will seek to determine the cash flow and net income through a certain period of time. This approach is also sometimes called “the earnings-based method.” 

• MARKET-BASED VALUATION: This method compares comparable businesses that were recently sold to obtain the valuation of the business in question. However, even though businesses are comparable in terms of products or services provided and in other aspects, there are factors that can influence the results. One business, for instance, may be located in an area with high demand for the product or service, whereas the one being compared is in an area with lesser demand. 

• ASSET-BASED VALUATION: This method involves totaling the assets of the business and subtracting the liabilities. The result is sometimes called “book value.” This method is best employed when there are tangible assets, such as real estate underlying the business.  

Division of the Business 

How the business is ultimately divided goes back to the discussion of community, separate, and commingled property. If, for instance, one spouse owned and operated the business individually before and after marriage, it might be considered separate property, but if the new spouse helps with the business, it could become community or commingled property. 

If one or both spouses started the business during the time of marriage, it is then definitely community property. If one spouse inherits the business during the marriage, it is separate property unless that spouse involves the other spouse, which could make it commingled. As you can see, step number one is determining which property classification it falls under. 

Options Available 

Remember, in California, the spouses can develop their own plan for the division of assets and debts and submit it to the judge for approval. So long as the agreement is not one-sided, the judge is likely to look upon it favorably. If you leave the division to the family law judge, however, a 50/50 allocation is the most likely initial result. 

Assuming the spouses agree on dividing everything, they can embrace different choices when it comes to the business. For instance, one spouse could agree to buy out the other spouse. The spouses could jointly sell the business and split the proceeds, or they could agree to operate the business as co-owners. There is also the possibility, if the business is deemed separate property, that the owning spouse will continue to operate and own it. Whichever approach is chosen or necessitated, the decision must be based upon a thorough and complete valuation.