Dividing Small Business in Divorce California
If you own a small business in California (or any other state), do not get married without getting a prenuptial agreement. I’ll say that again: if you own a small business, do not marry without a prenup.
Dividing a Business in Divorce
Some assets are easy to divide in divorce. A business is not. Why? Because no one really knows what the value of a business is. The owner will always argue that the value is 0, because it is his/her efforts that make it worth something. Thus, my law firm is most certainly worthless without me! Why should it be valued at 1 million dollars (meaning, I owe my spouse $500,000) if I divorce?
Fighting About the Division of a Business Costs More than the Business
In a divorce, you pay for answers to things. If you and your spouse cannot agree, you’ll pay forensic accountants to value your business.
I’ll pay a forensic $88,000 to value my business at 0, or $100,000 which is a family law attorney’s salary on the open market. My argument: if I quit running my business, it’s worth $0. I’ll just go get a job at a firm instead.
Then my spouse will pay his forensic $88,000 to value my business at 3x the gross receipts. Say, I had gross receipts of $700,000 last year. This will make my firm worth $2.1 mil.
Your heads are spinning but these are true scenarios. I’ve litigated cases where my report says 0, and the other side’s report says 5 mil. Then we sit there in front of a private Judge who is charge $1,000 per hour ($8,500) minimum, and she splits the baby.
That’s the silliness of divorce, and that’s why you absolutely need to protect your small business from ever needing to be valued. Keep it separate. Get a prenuptial agreement. It will be the best $5,000 you ever spent.
In A Divorce, Three Ways to Divide a Business
First Way: The Spouse With Greater Involvement Buys Out Other
Usually this makes the most sense. If one person is actively involved in the business, he or she will likely get it in the divorce. This makes the most financial sense. If I go through a divorce, I will likely get awarded my law firm.
The issue then becomes how to compensate my spouse? Well, in my case, my business is separate because I have a prenuptial agreement. If you do NOT have a prenup, and you cannot reach an agreement as to how to divide your business, you will need to hire a forensic for valuation.
Be careful of the double-dipping issue, and consider some Anti-White double-dipping language.
Second Way: Sell Business, Divide
Sometimes it’s cheaper to just get rid of it. If your business is not profitable, you certainly don’t want to “buy out” your spouse. I’ve seen divorces where one spouse says, “You can HAVE the business! It’s worthless!!”
Then the other spouse says, “No, I don’t want the business! I want $500,000 because it’s worth 1 million!”
This is the stupid dance people do in divorce. Many stupid dances can be avoided by hiring a competent divorce mediator.
Third Way: Stay Co-Owners
Normally I don’t think this is a good idea. But there are some people out there who can’t stay married, and yet can run businesses together. In fact, there are LOTS of people like this. That’s amazing. If you can, do it.
Dividing Small Business in Divorce California can be complicated and frustrating. I would recommend speaking with a lawyer and deciding whether or not it’s worth it to hire a forensic.