There are particular features of divorce and business laws in California which mean that if a marriage breaks down, business owners and their former spouses must consider a range of safeguards and options. This is the second in a two-part series.

This is the final part of a two-part feature examining aspects of California divorce law and what happens to the ownership of business assets. Given the issues at stake – including the jobs of those working in affected in businesses – it is easy to see why this is an important topic. The author is Ernest Baello, a partner at Moradi Neufer. The editors are pleased to share this content; the usual editorial disclaimers apply. To comment, email the editors at tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com.

For a California business owner, identifying and protecting an ownership interest represents only one part of the challenge created by divorce, an owner must also decide how to address any community property claim without damaging the company’s cash flow, disrupting its operations or forcing an unwanted sale.

The available solutions may include a cash buyout, an exchange involving other marital assets or payments spread over time. The right approach depends on the company’s value, the liquidity of the marital estate and the owner’s ability to plan early and assemble experienced legal and financial advisors.

Most divorcing spouses do not want to remain business partners after the marriage ends, but dividing a company into two equal pieces may not be practical, and forcing a sale may damage both spouses financially. In many cases, the owner retains the company while the other spouse receives value for any community property interest through cash, other assets or payments made over time.

Cash buyout
A cash buyout often provides the cleanest separation as the business owner pays a lump sum equal to the spouse’s community property interest, and the spouse gives up any further claim to the company.

The difficulty in this option involves liquidity. Many owners hold substantial value inside the company but lack enough available cash to fund a large immediate payment. Borrowing may provide the necessary funds, but new debt can strain the business and create significant long-term costs.

Asset offset
An asset offset may offer a more practical solution; rather than paying cash, the owner gives the spouse a larger share of other community assets with an equivalent value.

For example, the business owner may surrender an interest in the family home in exchange for the spouse’s interest in the company, or the spouse could receive a larger portion of retirement accounts, brokerage assets, savings or other liquid property. Rental properties and other investment real estate may also form part of the overall division.

An offset can allow the owner to retain control without placing an immediate cash burden on the business, and the feasibility of this option depends on the value, liquidity and character of the other assets available for division.

Structured payments
When the marital estate lacks enough cash or offsetting assets, the parties may negotiate a structured payment arrangement. Wherein the owner pays the spouse over time through a promissory note secured by the company or other collateral. Spreading the obligation across many years may reduce the immediate effect on cash flow, although the arrangement requires careful terms governing security, interest and payment obligations.

No single method works for every business or marital estate. The appropriate structure depends on the company’s value, its available cash, the spouses’ other assets and the tax consequences of the proposed division.

Because different settlement structures can create different long-term tax and cash-flow results, the family law attorney should coordinate with tax professionals before the parties finalize an agreement.

Steps business owners can take before a divorce begins
Business owners do not need to wait for a divorce filing to reduce risk. Several practical measures can improve the company’s position whether divorce appears imminent or remains only a future possibility.

Maintain clear financial boundaries
Owners should keep business and personal accounts separate and maintain detailed records, which is only possible when administered properly. Documentation should identify any separate property contributed to the company, including money invested before marriage or funds received through an inheritance. Loans and capital contributions should appear in writing, and the owner should maintain a clear record of distributions received from the company.

An owner anticipating divorce should also avoid sudden or unusual financial transactions. Large transfers, unexplained withdrawals or changes in compensation may attract scrutiny and complicate the financial analysis.

Review governing documents
Owners should reread operating agreements, buy-sell agreements, shareholder agreements, partnership agreements and corporate bylaws with divorce-related risks in mind. That often means having an attorney working with you. They should confirm that the entity remains in good standing and that its filings with the California Secretary of State remain current. Employee and contractor confidentiality agreements should reflect the company’s present operations, and owners should review applicable insurance coverage.

Consider timing and communication
An unmarried owner should begin the prenuptial agreement process well before the wedding, and a married owner concerned about future separation should speak with a family law attorney about whether a postnuptial agreement could address the company.

When divorce appears likely, owners should avoid discussing legal or financial strategy with their spouses outside a structured setting. They should also use caution when communicating in writing or posting on social media. Statements made informally can later appear in court.

Assemble the right professional team
A family law attorney experienced in divorces involving closely held businesses should generally serve as the first point of contact.

Depending on the case, the attorney may work with a forensic accountant, qualified business appraiser, certified public accountant or tax advisor. These professionals can analyze financial records, calculate the company’s value and model the practical consequences of different settlement options.

Early preparation creates more choices. Delay can allow manageable issues to develop into expensive disputes, particularly when communication between the spouses deteriorates.

Choosing counsel for a business-related divorce
Not every divorce attorney regularly handles cases involving closely held companies.

Business-related divorces require familiarity with California community property law, financial discovery, business valuation, corporate records and settlement structures. An owner evaluating counsel should consider whether the attorney offers:

--  Meaningful experience with business valuation disputes; 
--  Established working relationships with forensic accountants and qualified business appraisers; 
--  The ability to manage complex discovery and seek protective orders; 
--  Experience negotiating buyouts, asset offsets and structured payment arrangements; and  
--  Courtroom experience for cases that cannot be resolved through settlement. 

Technical qualifications matter, but so does the attorney’s ability to understand the company itself.

A privately owned business is not simply a figure on a balance sheet. It may employ numerous people, depend on the owner’s personal relationships and operate under financial constraints that do not appear in a valuation report. An effective attorney should learn how the business functions, identify the owner’s priorities and explain the strengths and weaknesses of the available legal and financial positions.

Divorce can create serious risks for a California business owner, but it does not automatically require the loss or sale of the company. Prenuptial and postnuptial agreements, carefully drafted corporate documents, confidentiality protections and workable settlement structures can help owners preserve control while addressing legitimate community property claims.

The earlier an owner begins planning, the more options may remain available. With a coordinated legal, valuation and tax strategy, business owners can protect the companies they built while preparing for financial stability after the divorce.

This article provides general information and does not constitute legal advice or create an attorney-client relationship. Business owners should obtain advice based on the specific facts and circumstances of their situations.