“How do we divide up the business I started before I got married?” - Separate Property Business Valuation

California is a community property state. Unless there is a prenuptial agreement, everything that the husband and wife acquired during the marriage belongs to both of them equally. This also means that the property of each spouse which is deemed as separate will be owned by that spouse alone. During a divorce, the spouse does not have any right to the separate property of the other. Property can refer to a house, car, stocks, or a business, among many others.

So, what happens to property that is separate but can also be considered community? A business, owned by one spouse before the marriage but significantly grew during the marriage, falls under this category. It is assumed that both spouses contributed to the growth of the company during the marriage.

The company itself is separate, but its growth, earnings, and increase in value are considered as a community. During the divorce, the separate property will not be divided, but the community property will be divided between the couple.

The courts in the state of California use two methods to compute the value of the community property component of the business: The Pereira Formula and Van Camp Formula. Briefly, here’s what each of them means.

What is the Pereira Formula?

The Pereira Formula was named after a divorce case back in 1909, Pereira v. Pereira. The Pereira Method is the preferred formula when the management and work of the owner spouse (the spouse who owned the business before the marriage) bring growth to the business during the marriage.

The court will compute the sum of the value of the business prior to the marriage and the reasonable growth and earnings that can be expected from the type of business. The sum will be considered as the separate portion of the business, while the rest will be considered community.

The Pereira Formula is used when it is the skills and talents of the spouse that helped the business catapult into its immense success. Often, it is used in businesses where the growth is based on the professional involved and not in the type of business. Common examples of these businesses are law firms, medical clinics, and accounting firms, as well as sole proprietorships where the couple contributes to more than 50% of the work needed for the business to grow.

What is the Van Camp Formula?

The Van Camp Formula was named after the California case, Van Camp v. Van Camp in 1921. It is the formula used when it is the nature of the business that caused its growth and not the skills, efforts, and work of the owner spouse. This formula improves the value of the separate property.

The formula often applies to larger businesses, where growth is due to market trends and external forces. The growth may also be due to new product development, market trend or new technology used in the operation of the business.

The community property is determined by computing a fair salary he or she would have received while working for the company. The annual salary will be multiplied by the number of years of the marriage. The remaining will be considered as separate property.

Which is the better formula?

The court will choose the best formula depending on the situation of the divorcing couple. There are cases when the court will also use a combination of the two methods. The Pereira Formula tends to be more beneficial for the community. In contrast, the Van Camp Formula tends to be more favorable to the owner spouse.

In court, a judge will choose a method to compute the value of the separate and community portion of a business based on the law.  Sometimes, however, the time and sacrifices that a person has devoted to the success of a business or family cannot be computed by formula alone.  Other factors can affect how each spouse has contributed to their family.

Taking your divorce to a divorce mediation attorney in Orange County can help you achieve a fairer and more just division of your business and property. More than just using a specific formula, your family law mediator will listen to both sides objectively. This way, you can get to what you both agree is a fair division.

If you have questions about dividing up any assets in your divorce, including a business, please call us at 714-549-6179 or email us at info@cordiallaw.com for a free consultation.