If you own a business and you do not have a prenuptial agreement that shields it from the divorce process, when you get divorced, your business will be treated similarly to any other asset in your marital estate even if you owned the business before marriage. This means that at least a portion of your business (if not your entire business, depending upon whether you founded or acquired it prior to or during your marriage) will be subject to division under California’s community property law.
In order to divide your community property interest, you need to know what it is worth. With respect to a privately-held business, this means obtaining a valuation. While there are different methods for valuing a business in a divorce, generally speaking, some of the key factors include the following:
1. Cash Flow
Cash flow is the lifeblood of any business, and it is a key factor in determining the value of a business as a going concern. Sizable cash flow can lead to a sizeable valuation (which you may not necessarily want for purposes of your divorce), and business owners will need to be able to produce clear accounting and tax records in order to avoid challenging (and potentially costly) disputes during the divorce process.
2. Physical Assets
Physical assets (including inventory, equipment, machinery, furnishings, and vehicles) are factors in determining the value of a privately-held business as well. In order to arrive at an appropriate valuation, all physical assets must be properly depreciated, and business owners must be careful to identify any assets (such as phones, laptops, and cars) that may be personal, rather than business, assets.
3. Intellectual Property (IP) Assets
Intellectual property (IP) assets include registered and unregistered trademarks and copyrights, as well as patents, trade secrets, and proprietary information. Depending on the nature of a business, these assets can potentially have substantial values themselves, and they may need to be appraised before the business can be valued as a whole.
4. Cash Reserves and Investments
Cash reserves and investments will have a direct impact on the value of a business. This includes funds and securities held in cash and non-cash accounts, and it includes working capital and assets subject to capital gains tax.
Contracts with clients, customers, employees, vendors, banks, and other entities can potentially have value as well. While not all contracts will have a value, significant contracts can be intangible assets that add to a company’s overall valuation.
6. Real Estate
Real estate that is titled to a business will be considered in the business’s valuation and not as a separate asset in the division of community property. Similar to IP assets, real property will need to be valued separately before being factored into the overall value of the business. Improvements may need to be depreciated; and, for leased real estate, the lease agreement may have value as an intangible asset.
7. Human Capital
Human capital can be a hugely significant factor in the valuation of a business, especially in the case of a professional practice or other small, owner-operated company. Valuing these types of businesses involves special considerations, since the business may not be sustainable without its owner’s involvement.
In any case, in order to make informed decisions about protecting your business (and other prized assets) in your divorce, you first need to know exactly what is on the table. For more information, we encourage you to download our free e-book, Protecting Your Business in a California Divorce; and, if you have specific questions, we encourage you to contact us for a confidential initial consultation.
Request a Confidential Initial Consultation
To request an initial consultation at our family law offices in North County, please call 888-837-3564 or contact us online. With more than 25 years of family law practice, founding attorney Richard M. Renkin has represented business owners in divorce throughout the San Diego area.