"Out Spouses" Entitled to be Compensated in Family Business Buyouts

It is common for one spouse in a marriage to operate a family business while the other spouse takes care of the children or works another job as a W-2 employee. When a divorce action is filed, often, the managing spouse often claims that the business has little to no inherent value as "it would fold without me." Or, the argument is made that the business has no real value because it lacks any potential "outside" buyers.

California law achieves fairness by treating the out spouse as a silent partner who is entitled to an "investment value" buy-out. Marital community property law in CA is viewed as a partnership in which the spouses are equal partners.

If an active market existed for the stock, its MARKET VALUE could be determined, but if none existed, then its INVESTMENT VALUE should be determined.

Investment value differs from fair market value in that investment value measures the value of the business to a specific buyer, e.g., the operating spouse, rather than to a hypothetical buyer, as required for fair market value, aka FMV

Whether to use investment value or FMV in a family law case is determined by whether the asset being valued is marketable. From the idea of investment value follows the principle that the non-operating spouse is entitled to a full buyout as a withdrawing "silent partner" even when non-transferable assets and rights are involved.

The investment value approach has for decades acknowledged that the professional practice or small business in which the operating spouse's skills, efforts and talents are both the (1) key to the value of the business, and also (2) truly not transferable to a third party will still have value to the operating spouse, this value may include goodwill. This is because the day after the case is resolved, "the operating souse will walk to the front door, turn the key and an ongoing business will be in place, just as it was the day before."

Closely held family businesses are typically not suited to FMV valuations.

Even though managing spouses may genuinely feel this way, the "I'm the business and therefore don't have to buy him or her out at full value" argument has long been untenable in family law property divisions.

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