Dividing a Family Business in California Divorce
Understand community-property rules, proven valuation approaches and practical funding strategies so you can split a company without destroying it—or your finances.
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When a California marriage includes a closely held company—whether a local restaurant, a professional practice or a tech start-up—the divorce no longer ends at bank accounts and retirement plans. One spouse’s livelihood can also be the couple’s largest asset, and the other spouse may hold a silent fifty-percent ownership stake under community-property law. The stakes rise quickly: valuation reports reach five figures, courts scrutinise cash flow for both spousal support and buy-out math, and tax traps hide in S-Corporation distributions.
This in-depth guide walks you through every stage—classifying the enterprise, choosing the right valuation approach, negotiating a buy-out and enforcing the note—so you can protect both the company and your financial future. Use the interactive CSV tool near the end to organise asset categories before your first expert interview.
Is the business community or separate property?
California presumes that everything acquired between the date of marriage and date of separation is community property. But businesses often pre-date the wedding or evolve during the marriage, which means courts must parse origins, appreciation, and the famous Pereira/Van Camp formulas. Pereira credits the operating spouse’s skill (labor) while Van Camp credits market forces.
Documentation checklist
- Articles of incorporation / formation
- Initial capital contribution records
- Five years of tax returns & K-1s
- Shareholder or operating agreements
- Buy-sell or prenuptial provisions
- QuickBooks or general ledger backups
- Payroll & distribution history
Mixed or commingled ownership
Suppose Taylor launched a coffee-roasting LLC two years before marrying Jordan, but the couple invested marital savings to expand equipment and hired Jordan as marketing lead. The court may treat the pre-marriage value as Taylor’s separate property, then apportion post-marriage growth between separate and community shares using Pereira (if labor drove value) or Van Camp (if market demand was key). In practice, experts often run both models and negotiate a midpoint.
How business value is calculated
Income approach
The most common method for small to mid-sized California companies capitalises normalised earnings
(EBITDA or SDE) by a risk-adjusted rate. For example, with normalised earnings of $250,000 and a
22 % cap rate less 3 % growth, value equals:
$250,000 ÷ (0.22 − 0.03) = $1.32 million.
Experts adjust for one-time expenses, owner perks and market-rate replacement salaries.
Market approach
Comparable sales of similar private companies—sourced from databases like Pratt’s Stats—produce valuation multiples (price / revenue or price / earnings). This works best for standardised industries (auto repair, insurance agencies). Courts often cross-check market conclusions against income results to confirm reasonableness.
Asset approach
For holding companies or capital-intensive enterprises, experts appraise individual assets and subtract liabilities. Intangible goodwill (the expectation of future earnings) may still apply, especially for professional practices. California distinguishes personal goodwill (non-transferable, tied to owner skill) from enterprise goodwill (transferable). Only the latter is usually divided.
Neutral vs. party-hired experts
| Factor | Neutral 730 expert | Party-hired expert |
|---|---|---|
| Perceived objectivity | High—court appointed | Viewed as advocate |
| Typical fee range | $7k – $20k (shared) | $10k – $40k each |
| Discovery burden | Centralised requests | Duplicate document sets |
| Cross-examination | Usually minimal | Rigorous challenges |
The Elkins Task Force encourages transparent, joint experts to reduce cost—yet in high-stakes cases each spouse often retains an evaluator, then stipulates a joint rebuttal to narrow disputes. Budget ladder: companies valued under $500k usually survive on a single expert (~$7k–$12k); $500k–$3 million often require two experts plus a joint reconciliation report (~$20k total).
The double-dip problem
Imagine Casey keeps a marketing agency that nets $300,000 per year. Guideline spousal support claims 40 % of Casey’s income—$120,000. If the court also divides the equity value of that same income stream 50/50, Casey pays both a support order and a lump-sum equalisation based on identical cash flow. Negotiators often recapture by discounting the buy-out or adjusting support downward. Judges have discretion to avoid “double dipping” under Fam. Code §4320.
Funding the buy-out
Refinance or SBA loan
Many owners refinance corporate real estate or obtain an SBA 7(a) loan to pay the non-owner spouse in one lump sum. Lenders often require a signed Marital Settlement Agreement before underwriting.
Installment note
If cash is tight, spouses agree on a secured note—typically 4- to 7-year amortisation, with market-rate interest (IRS AFR applies). A 5-year, $500k note at 6 % equals $9,667 monthly; run debt-service tests against projected net disposable income.
Asset trade-off
Instead of cash, the non-owner spouse may keep a larger share of retirement accounts, equity in the house or investment accounts. Use discount rates for liquidity and tax impact before swapping—retirement assets are pre-tax.
Creative structures
Earn-outs tie future payments to revenue targets, while “ESOP-lite” programs allocate shares gradually to the buying spouse. These require tight definitions of performance metrics and security provisions to satisfy courts.
Tax implications you can’t ignore
Transfers incident to divorce are generally non-taxable under IRC §1041, but installment interest is taxable income to the recipient and deductible to the payor. S-Corporation shareholders must watch for built-in gains if the company converts from C-Corp within five years. Depreciation recapture (IRC §1245) can surprise owners who trade machinery for equity. Keep Form 8594 (Asset Acquisition Statement) handy when allocating goodwill vs. tangible assets.
| Issue | Sole proprietor | Corporation | LLC/LLP |
|---|---|---|---|
| Valuation complexity | Lower | Higher—stock & retained earnings | Moderate—units & capital accts |
| Liability exposure | Unlimited personal | Corporate veil | Varies by management |
| Tracing difficulty | Bank statements | Share issuances, minutes | Operating agreement amendments |
| Tax quirks | Schedule C SE tax | B-I-G, double tax risk | Phantom income on K-1 |
| Goodwill treatment | Personal heavy | Enterprise prominent | Split varies |
Step-by-step business division checklist
- List formation date and initial capital sources.
- Exchange full financial disclosures (FL-140, FL-142).
- Retain a neutral or party expert; define scope.
- Provide five years financials & supporting docs.
- Receive draft valuation; review normalization adjustments.
- Run double-blind scenario for support + buy-out affordability.
- Negotiate buy-out terms or sale; draft term sheet.
- Finalize Marital Settlement Agreement language.
- Execute security agreements & UCC filings.
- Calendar compliance dates and annual financial reporting.
Enforcing a buy-out note
Even the best-drafted note fails if unsecured. California practitioners record UCC-1 financing statements against business assets, include cross-default clauses (miss two monthly payments and the full balance accelerates), and add a confession-of-judgment provision so the payee can obtain a judgment without a lawsuit. Annual financial reports and personal guarantees strengthen collection options.
Business-asset CSV generator
Enter each major asset or category with your estimated fair-market value and percentage you believe is community. Download the CSV and share it with your 730 expert or mediator.
| Asset / category | Estimated FMV ($) | % community |
|---|---|---|