When a Divorce Puts the Business on the Table
Most owners of a family business have never considered what a divorce would do to it. The business is the thing that pays for the house, the school fees, the retirement that has not happened yet. It is also, in California, very likely community property, and that means a divorce puts it squarely on the table.
I started my career in family law in 2008 and spent most of the years since in transactional business work. The place those two worlds meet is a divorce where a family-owned business is at stake, and it is the only family law work I take on. What follows is general information rather than advice about your situation.
Two bodies of law, pointed at the same company
A closely held business lives under the corporations code, the operating agreement, the shareholder agreement. A marriage dissolving lives under the family code. When the same company is subject to both at once, the two do not always agree, and the gap between them is where owners get hurt.
California’s community property model shapes how ownership interests are treated, whether those interests sit in an entity, a trust, or a sole proprietorship. Where a business is owned wholly by the marital community, the code generally treats each spouse as owning half. That is a very different starting point from the ownership table the founders thought they had.
The restraining orders nobody warned you about
When a divorce petition is served, automatic temporary restraining orders take effect. They constrain what either spouse may do with assets, and a business owner who keeps operating as though nothing changed can walk into serious trouble without intending to. I have seen matters go badly when one spouse began moving assets or drawing on company funds after service, believing the business was still simply theirs to run.
If you are served and you own a business, that is the moment to get counsel, before you make the ordinary decisions you have made a thousand times before.
The valuation fight is a negotiation, not a formula
I am not aware of a formula that family law courts apply to dividing a business. What happens instead is a negotiation, and it is a strange one.
Typically one spouse is the in-spouse who runs the company and the other has been doing something else. Their views of what the business is worth can be enormously far apart, sometimes for honest reasons. Then the trading begins. Say the couple owns an expensive car and a mid-sized construction company. The spouse who wants the car has an interest in the company being worth less. The spouse who wants the company has the same interest, for the opposite reason.
Courts tend to be alive to this. In my experience judges understand that one party will undervalue and the other will overvalue, and the better-prepared party with a credible valuation professional tends to fare better. That is as true in ordinary business dissolutions as it is in a divorce.
What the business is worth without the person running it
There is a harder question underneath the valuation, and it is the one owners least want to answer. How much of this company is the company, and how much of it is you?
Lawyers call the difference goodwill, and in a business built around one person it is very difficult to put an honest number on. I use my own firm as the example, because it is the one I can be blunt about. My firm is worth something while I am running it. If I had a heart attack tomorrow, my associates would find work elsewhere, and what remained would be a lease and a shelf of used law books. That is what my business is worth when I am no longer attached to it.
Any owner facing a division of a personal-services business should understand that this number will be argued over hard, from both directions.
What usually happens to control
In the small businesses I work with, I have not seen family law judges award joint management of a company to two people who are divorcing. The business generally goes to one spouse, and the other is made whole with other assets. Whether the parties can keep working together during the proceeding is a different question, and the honest answer is that it depends entirely on the people.
I have seen a couple who divorced, kept running a successful transportation business together, and were still at it decades later. I have also handled a divorce where a smaller business that supported the whole family came close to bankruptcy, not because of the market, but because two people no longer trusted each other and could not stop bringing that into the company. The business was the asset that fed everyone, and it nearly did not survive.
Where the protection actually happens
Here is the part worth taking away, and it happens years before anyone files.
We look to the governing documents to see how a business is managed when it comes apart. The operating agreement, the shareholder agreement, the buy-sell agreement. These are the documents that answer who may own an interest, who decides what, how a departing owner’s stake is valued, and what happens if an interest is transferred by a court rather than by choice.
Most of the grief I have watched owners suffer traces back to a shortcut taken when those documents were drafted. Not a hidden risk. A foreseeable one that nobody wanted to spend the afternoon on. It may never happen. But it is foreseeable, and the time to address it is when everyone is on good terms and nobody is angry.
That drafting is business work, not divorce work. It is the least dramatic thing a business attorney does, and it is the thing that protects a company when the drama arrives.
One more thing
The tax consequences of dividing or buying out a business interest are real, and they are not my field. Some transactions between spouses are taxable and some are not. I bring in a tax attorney or a CPA and have my clients speak with them directly, because that determination belongs with someone who does it for a living.
This article is general information about selling a business. It is not legal advice, and reading it does not create an attorney-client relationship. Every sale turns on its own facts. For guidance on your situation, speak with a qualified attorney