Dividing a family business in a California divorce can be one of the most challenging parts of property division. Because California is a community property state, any business started or grown during the marriage may be considered shared property, even if only one spouse ran it.
The court looks at ownership, contributions from both spouses and the business’s current value. From small family-run operations to larger enterprises, factors like goodwill, income, and separate vs. marital investments all influence how the business is split.
Accurate valuation and legal guidance are key to ensuring a fair and legally sound outcome for both parties.
Understand Community and Separate Property First
In California, according to California Family Code § 760, assets acquired during the marriage are typically considered community property. That means both spouses own them equally, regardless of whose name is on the title or who contributed more money or effort.
But not everything falls under community property. If one spouse started a business before the marriage or inherited it during the marriage, that business might be considered separate property. However, things can get complicated fast.
Let’s take a look at an example to understand better:
Let’s say one spouse owned a business before the marriage. If that business grew significantly during the marriage, maybe because both spouses worked in it or used marital funds to expand it, that growth might be considered community property.
For example, a wife started a flower shop before getting married. During the marriage, her husband helped manage the shop, updated the website, or paid for renovations. If it were done using joint income, then a portion of the business might become community property.
This is called commingling—when separate and community property mix. When that happens, courts need to figure out how much of the business is community-owned and how much remains separate. That’s not always easy, and it often requires expert help.
How Courts Determine the Value of a Family Business
Once it’s clear that a business (or part of it) is subject to division, the next step is putting a dollar value on it. This is one of the most critical parts of the process.
There are three main ways experts can value a business:
- Market Approach: Look at what similar businesses have sold for recently. This is helpful if the business is in a common industry with lots of comparables. For example, valuing a neighborhood café or a retail clothing store often fits this method.
- Income Approach: Analyzes the business’s future earning potential and then calculates its value based on expected profits. This is often used for service-based businesses like law firms or consulting agencies.
- Asset-Based Approach: Adds up all the business’s assets and subtracts its debts to determine its net value. This works well for businesses with significant inventory or equipment, like construction companies or manufacturing units.
- Pereira Approach: This method gives a fair return on the original, separate-property investment to the owning spouse. Any remaining growth during the marriage is considered community property.
- Van Camp Approach: calculates how much the working spouse should’ve earned in salary during the marriage. That amount is treated as community property. Anything beyond that stays separate property.
Each method has its pros and cons, and not every approach works for every business. A local bakery will be valued very differently from a tech startup or a dental practice.
Courts typically rely on forensic accountants. They are financial experts trained in divorce and litigation to do these valuations. They review financial records, tax returns, and business operations to give the court a fair estimate of the business’s worth.
Options for Dividing a Family Business in Divorce
Once the value is set, the next step is figuring out how to divide it.
Here are the most common options:
Option 1. Buyout
In this scenario, one spouse buys out the other’s share of the business. The buying spouse keeps the business, and the other receives cash or other assets equal to their share.
This is often the cleanest solution, especially when only one spouse is actively involved in running the business. For example, if the husband has always managed a mechanic shop while the wife worked a separate full-time job, a buyout would make sense.
However it requires one spouse to have enough money or other assets to make the buyout possible.
Option 2. Co-Ownership
Some couples choose to continue owning the business together after divorce. This can work if both spouses are deeply involved in the business and still have a working relationship.
However, co-ownership after divorce can be risky. Emotional tension, misaligned goals, and new relationships can all cause friction. For this reason, courts often discourage it unless the parties have a very clear and detailed agreement in place.
An example might be ex-spouses who co-own a family-run restaurant and are both still involved in daily operations. If they communicate well and want to keep the business running, co-ownership might be workable.
Option 3. Sale of the Business
If neither spouse wants to keep the business or can’t afford to buy the other out, selling it might be the best option. Once it’s sold, the proceeds can be split based on the agreed or court-ordered percentages.
While this may seem fair, it can also be disruptive, especially if the business is the family’s main source of income or has sentimental value.
Legal Agreements That Can Affect Business Division
Before jumping into the business division, it’s important to consider any legal agreements you may already have in place.
Prenuptial and Postnuptial Agreements
If you and your spouse signed a prenup or postnup that spells out what happens to the business in the event of divorce, that agreement can play a major role. As long as the agreement is valid and enforceable, courts will usually follow its terms.
These agreements can clarify ownership, protect the business from being divided, or determine how much one spouse is entitled to if the marriage ends.
Business Operating Agreements
If the family business has multiple owners, like partners or shareholders, there may already be operating agreements that outline what happens when one partner divorces. These documents can limit ownership transfers or require buyouts to keep the business intact.
For instance, if a husband owns a dental practice with two other dentists and is getting divorced, the partnership agreement might prevent his ex-spouse from receiving any ownership stake.
In addition to legal agreements, courts may recommend or require mediation or litigation to resolve disputes over the business division. Mediation is usually less expensive and more collaborative, while litigation can be time-consuming and emotionally draining.
How to Protect Your Business During and After Divorce
Dividing a business can be emotionally and financially stressful, but there are steps you can take to protect your interests:
- Keep Records: Maintain clear financial records showing when and how the business was started, where funding came from, and who contributed what.
- Avoid Commingling: Try to keep separate and marital finances distinct. Don’t use joint funds for business expenses unless necessary.
- Consider a Prenup/Postnup: If you’re running a business, having a legal agreement in place can provide clarity and peace of mind.
- Work with Professionals: Consult with a family law attorney, business appraiser, and financial advisor who understands California law and business operations.
Dividing a business doesn’t have to ruin it. With careful planning and the right legal support, you can come to a fair and workable solution.
Frequently Asked Questions
Is my wife entitled to half my business if we divorce in California?
If your business was started or grew during the marriage, it’s likely considered community property. That means your wife could be entitled to half its value, even if her name isn’t on the paperwork. However, if you owned the business before the marriage and kept it separate, she might not have a claim—unless marital funds or joint efforts contributed to its growth.
What assets cannot be split in a divorce in California?
Assets considered separate property aren’t divided in a divorce. This includes property owned before the marriage, inheritances, personal gifts, and compensation from personal injury settlements. To keep them separate, it’s important that they weren’t mixed with joint assets during the marriage
Can your wife take half your business in a divorce?
In California, if the business is deemed community property—meaning it was started or expanded during the marriage—your wife may be entitled to half its value. Even if the business began before marriage, any increase in its value during the marriage could be subject to division.
What is the 5 year rule for divorce in California?
The “5-year rule” refers to summary dissolution, a simplified divorce process available to couples married for less than five years. To qualify, you must have no children together, limited shared debts and assets, and both agree to waive spousal support. It’s a quicker, less formal way to end a short-term marriage.
What is the 10-year rule for divorce in California?
If you’ve been married ten years or more, the court makes no set assumption about when spousal support must end. It can continue as long as one spouse still needs it and the other can pay.
Contrary to popular belief, there’s no “permanent alimony” simply for a long marriage; the court just retains jurisdiction to revisit support orders over time. You may also qualify for Social Security benefits on your ex’s record at retirement if you don’t remarry and meet other requirements.
Get Legal Help to Make Smart Business Decisions
Dividing a family business in a California divorce is rarely straightforward. Between community property laws, business valuations, and emotional ties to the company, the process can quickly become intimidating.
That’s why having an experienced family law team on your side is a must!
At Moore Family Law Group, we’ve helped countless clients navigate the complications of dividing businesses during divorce. Our team understands both the legal and financial sides of the process, and we’re here to protect what matters most to you.
If you’re facing a divorce and need guidance on how to handle your business, schedule a consultation with us today. Let’s find the best way forward together.