What Will Happen to My Business During My Divorce? What Business Owners Need to Know About Divorce

For many business owners in Temecula, Murrieta, Menifee, Corona, and across Riverside County, their company is the most valuable thing the marriage owns. It is often the family's main source of income, too. When a high asset divorce begins, the business keeps running, but it also becomes part of the case.

If you are asking questions like "Will my spouse get half my business?", "How do they figure out what my business is worth?", or "Can my spouse take over the company?", this guide is for you. Below, we explain in plain English how California divorce courts treat a business, how a court appointed expert under California Evidence Code section 730 values it, and what you can do now to protect what you have built.

Is my business community property or separate property?

California is a community property state. In general, anything either spouse earns or acquires during the marriage is presumed to belong to both spouses equally (Family Code section 760). That presumption is the starting point for any business.

• You started the business during the marriage. It is usually presumed to be community property, even if only one spouse's name is on the LLC, corporation, or business license, and even if only one spouse runs it.
• You started the business before the marriage. It generally starts out as your separate property. But if the business grew in value during the marriage because of your work, the community may be entitled to a share of that growth.
• You received the business as a gift or inheritance. It is generally separate property, though the same growth rules can apply.
• Marital money went into the business. Using paychecks or other community funds to start, expand, or pay down debts of a separate business can create a community interest in it.

When a separate business grows during the marriage, California courts use two well known formulas to split the growth between separate and community property. The Pereira method generally applies when the growth came mainly from the owner's personal skill and effort. The Van Camp method generally applies when the growth came mainly from the nature of the business itself or from market conditions. Which formula applies can make a large difference in the final numbers.

A prenuptial or postnuptial agreement can change all of these rules, so it is one of the first documents an attorney will want to review.

What happens to my business while the divorce is pending?

Filing for divorce does not shut a business down, but both spouses take on legal duties right away.

Automatic temporary restraining orders

Every California divorce summons includes automatic temporary restraining orders, often called ATROs (Family Code section 2040). They bind the spouse who files as soon as the petition is filed, and the other spouse as soon as he or she is served. Among other things, they prohibit either spouse from transferring, borrowing against, hiding, or disposing of property without the other spouse's written consent or a court order, except in the usual course of business or for the necessities of life. Running the business day to day is fine. Selling major equipment, taking on large new debt, moving money out of business accounts, or changing who owns the company is not something to do without legal advice.

Fiduciary duties to your spouse

Spouses owe each other the highest duty of good faith and fair dealing, and that duty continues until the property is divided (Family Code sections 721 and 2102). The spouse who controls the business cannot use that control to drain profits, steer clients elsewhere, or make the company look less valuable before trial. If a court finds that a spouse hid or diverted a community asset through fraud, oppression, or malice, it can award the other spouse 100 percent of that asset (Family Code section 1101).

Full financial disclosure

Both spouses must exchange sworn declarations of disclosure listing all assets, debts, income, and expenses (Family Code sections 2100 through 2107). For a business owner, expect requests for business and personal tax returns, profit and loss statements, balance sheets, general ledgers, bank and credit card statements, payroll records, and formation and ownership documents. Incomplete or misleading disclosure can lead to monetary sanctions or, in some cases, a judgment being set aside years later.

Child support and spousal support

A business owner's support is not based only on the salary he or she takes. California courts look at the real cash flow available, which can include distributions, company paid personal expenses such as vehicles, phones, and meals, and other benefits run through the business (Family Code section 4058). The same financial expert who values the business is often asked to calculate the owner's income available for support.

How is a business valued in a California divorce?

Business valuation is usually the most contested issue in a divorce involving a business. California courts have a tool designed for exactly this situation: a neutral, court appointed expert under Evidence Code section 730, often called a "730 expert," "730 evaluator," or "730 business valuation."

What is an Evidence Code 730 business valuation?

Evidence Code section 730 allows the court, on its own motion or on the motion of either party, to appoint an independent expert to investigate, prepare a report, and testify on an issue that requires expert evidence. In a divorce involving a business, the court usually appoints a forensic accountant or certified business appraiser to determine what the business is worth and, often, how much income the owner actually earns.

Rather than each spouse hiring a separate appraiser and arguing over two very different numbers, a single neutral expert reviews the business on behalf of the court. Judges tend to find a neutral expert's opinion credible, and one shared expert is often less expensive than two competing experts.

How does a 730 evaluation get started?

Many business evaluations never need a court hearing. At NedaLawyer, attorney Neda Aguirre usually negotiates the terms of the evaluation directly with the other side, then puts the agreement in writing for the judge to sign. This approach often saves time and legal fees, and it lets both spouses have a say in the process instead of leaving every decision to the court.

1. The spouses try to reach an agreement. Through their attorneys, the spouses agree on who the evaluator will be, what the evaluator will review, the deadlines, and how the fees will be paid. The agreement is written up as a stipulation, and once the judge signs it, it has the same force as a court order.
2. If there is no agreement, one spouse asks the court. The spouse who wants the evaluation files a request asking the court to appoint an expert under Evidence Code section 730.
3. The evaluator is selected. When the spouses can't agree on who the evaluator should be, the court commonly orders one side to propose three qualified evaluators and the other side to choose one from that list.
4. The court issues an order. The order names the expert, describes what the expert will do (for example, value the business and figure out the owner's income for support), and sets deadlines.
5. The fees are divided. The expert's fees are split between the spouses in whatever shares the agreement or the court finds fair (Evidence Code section 731). Fees are often split evenly or paid from community funds at first, and the court can reallocate them later based on each spouse's income and ability to pay.
6. The expert gathers information. Both spouses must cooperate and turn over records. The expert may interview the owner, visit the business, and review several years of financial information.
7. The expert issues a report and may testify. Either spouse can call the expert as a witness and ask questions about the report (Evidence Code section 732).

Can I still hire my own appraiser or forensic accountant?

Yes. A court appointed expert does not prevent either spouse from hiring his or her own expert (Evidence Code section 733). Many business owners retain a private forensic accountant to review the 730 expert's work, point out errors, or offer a different opinion. The spouse who hires a private expert pays for that expert in full.

Common valuation methods

• Income approach. Values the business based on the earnings or cash flow it is expected to produce.
• Market approach. Compares the business to similar businesses that have sold.
• Asset approach. Adds up what the business owns and subtracts what it owes.

Goodwill can be divided, too

California treats goodwill, the value of a business's reputation and client base beyond its equipment and bank accounts, as divisible community property when it was built during the marriage. Unlike some other states, California can divide goodwill tied to the owner's personal skill and reputation. This matters most for professional practices, such as medical, dental, chiropractic, veterinary, accounting, engineering, and law practices, and for service businesses that depend on the owner's relationships.

What date is the business valued?

The general rule is that assets are valued as close as practicable to the time of trial. On a properly noticed motion, the court can choose a different date for good cause (Family Code section 2552). For example, if the business grew after separation mainly because of the owner's own hard work, or lost value because of outside market forces, the court may use a date closer to separation.

Red flags a forensic accountant looks for

A good forensic accountant looks for signs that business income or value is being understated: a sudden drop in revenue after separation, delayed invoicing, unusual cash transactions, inflated expenses, new "employees" who are friends or relatives, or payments to entities that the owner controls. Finding these issues can change the outcome of a case significantly.

Will my spouse get half my business?

The community portion of the business must be divided equally, but that rarely means your spouse becomes your business partner. There are three common outcomes.

1. One spouse buys out the other. This is the most common result. The spouse who runs the business keeps it, and the other spouse receives other assets of equal value, such as equity in the family home, retirement accounts, or investments. When there are not enough other assets, the buyout can be paid over time through a structured settlement.
2. The business is sold. If neither spouse can or wants to keep it, the business may be sold and the proceeds divided. This is the cleanest break, but a forced sale can lower the price.
3. Both spouses keep owning it. Some former spouses continue as co-owners under a detailed operating or shareholder agreement. This only works when the two can communicate and agree on how the business is run.

Transfers between spouses as part of a divorce are generally not taxed at the time of transfer under federal law, but a sale to an outside buyer can trigger capital gains tax. Have a CPA review the tax consequences of any buyout or sale before you sign a settlement.

What should I do after the divorce is final?

• Update your operating agreement, partnership agreement, shareholder agreement, and buy-sell agreement.
• Confirm that ownership records with the California Secretary of State, your bank, and your lenders match the judgment.
• Review how any ongoing child support or spousal support is tied to business income, and keep clean records in case support is later modified.
• Update beneficiary designations, estate planning documents, and any trust that holds business interests.

How to protect your business in a high asset divorce

Whether you own a winery or vineyard in Temecula Valley wine country, a medical or dental practice in Murrieta, a construction or trucking company in Menifee or French Valley, an equestrian property in Norco, or a growing company in Corona or Eastvale, a few early steps make a real difference.

• Gather your records now. Collect at least three to five years of business and personal tax returns, financial statements, and formation and ownership documents.
• Keep business and personal money separate. Stop running personal expenses through the company.
• Run the business as usual. Do not make unusual transfers, large purchases, or ownership changes without legal advice.
• Find your prenup or postnup. A marital agreement may decide much of the outcome.
• Plan for the valuation. Talk with your attorney early about whether to request a court appointed Evidence Code 730 expert, agree on a joint expert, or hire your own forensic accountant.
• Think about the future. Decide which outcome, a buyout, a sale, or continued co-ownership, best protects your employees, your clients, and your income.

Local representation in Temecula and Riverside County

Divorce cases for families in Southwest Riverside County are generally heard at the Menifee Justice Center, which serves Temecula, Murrieta, Menifee, French Valley, Winchester, Lake Elsinore, Canyon Lake, and surrounding communities. Cases for families in Riverside, Corona, Eastvale, Norco, Temescal Valley, and Moreno Valley are generally heard at the Riverside Family Law Courthouse. The courthouse that hears your case depends on where you and your spouse live, so confirm the correct location before you file.

Our Temecula office is minutes from wine country and a short drive to the Menifee Justice Center. Knowing the local judges, procedures, and expectations helps us prepare business owners for each stage of the case, from the first hearing through settlement or trial.

This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Every case is different, and past results do not guarantee a similar outcome. Attorney Advertising. NedaLawyer, APC, 43471 Ridge Park Drive, Suite C, Temecula, CA 92590.

YOU BUILT THE BUSINESS. LET NEDALAWYER HELP YOU PROTECT IT.