Small Businesses and Divorce

Running a small business with your spouse while ensuring a happy married life can sometimes be challenging. Both require considerable time, effort, and energy from the couple. It gets even more difficult when the marriage fails, as the ownership and management of the family-owned business can further complicate the separation. When this time comes, it’s best to hire divorce mediation services to help make the process smoother, less hostile, and faster for you.

During the divorce, both of you would want to protect your business’s assets and its daily operation. Your separation must not affect your small business. Family small businesses are usually not just owned by the couple. Other family members, such as children, siblings, and cousins can also have stakes in the family business. Going to court for your divorce can only make the process more stressful and time-consuming for all concerned parties.

An Orange County divorce mediation attorney can help you separate amicably and protect your business ownership. Your separation can be stress-free, and you can both go on your separate ways to have a fresh start. Through family law mediation, you and your spouse can settle peacefully and find reasonable compromises.

Factors that will Affect the Separation of Small Businesses in a Divorce

Here are the factors that your Orange County family law mediator may help you and your spouse consider when determining how to divide the business.

1.    An existing prenuptial agreement

Many business owners enter a prenuptial agreement before tying the knot to protect the business in case of a divorce. A prenuptial agreement is usually recommended when one spouse is a business owner. A prenuptial agreement attorney will help you draft the agreement.

The agreement is designed to protect both spouses. It protects the owner from having to divide the increase in business worth earned during the marriage. It also protects the non-owner from having to shoulder half the business’ debts. Take note that you also divide debts and liabilities during a divorce.

A prenuptial agreement is a contract that you should honor when you file for a divorce. Do not forget to inform your Orange County divorce lawyer if you have one.

2.    The date when the business started

Under California’s Family Code, community property is anything that you acquired during the marriage. You have to equally divide community property in terms of its worth upon divorce. The same is true with businesses.

Without any existing agreement, businesses started during the marriage should be divided equally during a divorce in California.

If one spouse owned the business before the marriage, you will divide the increase in business’ worth during the course of the marriage. However, your divorce mediation attorney may help you consider other factors. In some instances, your mediator may help you and your spouse consider how the business’ worth increased.

3.    The value of the business

Determining the current value of the business can be challenging. To get the most accurate worth of your business, your attorney or CPA can use the following three valuation methods. Each method takes into consideration either the asset, the market, or the business’ income.

·         The Asset Approach

The asset approach is a straightforward method that adds all the assets and subtracts the liabilities from the sum. It may seem simple at first, but people tend to give different values to different assets. This method is usually used for small businesses because of its inherent complexities.

·         The Market Approach

In the market approach, the valuation of the business is based on the price of similar businesses that have been sold recently. You cannot use this method if you cannot find similar businesses that have been evaluated and sold. It’s the least used approach of the three methods.

·         The Income Approach

The income approach is the most commonly used among the three methods. It considers the past performance and revenue of the business to project its future income. Income refers to the gains generated by the business’ products and services.

The advantage of using mediation for your divorce is that you and your spouse will have control over valuation methods. For instance, you and your spouse may agree on a forensic accountant who can help you determine the value.

4.    The division of the business

Once you and your spouse have valued the business, you may consider the following methods of division for the business.

·         Buy-out

Most couples with a profitable business wish to keep the business in-tact, rather than sell it.  Keeping a profitable business open is better for both spouses as it is a source of income for the supporting the spouse who will be awarded the business, and possibly a spouse receiving spousal and/or child support.  One spouse, usually the one who carried the day-to-day business operations will buy-out the other spouse by paying that spouse half of the value of the business. 

·         Equalization

Many divorcing couples do not have enough liquid funds for a true buy-out.  In such cases, couples may agree to trade assets in-kind to prevent liquidation of valuable assets.  For example, a business may be awarded to one spouse in exchange for the other spouse being awarded a house of similar value.

·         Liquidation

A divorcing couple may consider liquidating a business if it is an unprofitable one by putting it out on the market.  You may consider posting the business on certain business sale listings.  Divorcing couples may also sell and liquidate a business because they cannot come to an agreement on the division of the business or because they have an urgent need for liquid funds.   

Are you getting a divorce in California? Contact Cordial Family Lawyers now

We at Cordial Family Lawyers understand how difficult a divorce can be. We are here to help you save yourself from heartaches, as well as time and money. Through mediation, we will help you settle your disputes and disagreements, including how to divide your small business.

Our divorce mediation attorneys in Orange County will help you with the document preparation and provide you with legal and procedural guidance. Contact us today and let our flat fee divorce attorneys help you.