8 min read ยท Last updated September 2, 2026
- In California, an Automatic Temporary Restraining Order (ATRO) attaches to the divorce summons itself under Family Code Section 2040 and bars either spouse from selling, transferring, or borrowing against the business the moment the case is filed. Texas has no automatic version. You have to ask a judge for one.
- Courts weigh a closely-held business using the same income, market, and asset approaches described in the Internal Revenue Service’s (IRS) Revenue Ruling 59-60, and a business earning $120,000 a year in owner’s discretionary earnings can reasonably reconcile to about $400,000 to $600,000 once the income and market approaches are weighed together.
- California, New Jersey, and Texas treat the goodwill you built personally three different ways, and which state you’re in changes whether a real chunk of the business’s value is even on the table for division.
- Under California Family Code Section 1101, hiding or undervaluing the business during discovery can cost the spouse who did it 50% of the business’s value, or 100% if a judge finds fraud, malice, or oppression.
In this article
- How is the business valued?
- What to do in the next 24 hours
- Restraining order: what happens the moment you’re served
- The court’s valuation approaches
- Example with real numbers
- What if the business has other owners?
- What not to do: mistakes that turn a divorce into a fraud case
- The 30, 60, and 90 day sequence
- Frequently asked questions
A divorce does not automatically mean a business must be sold. However, the business may need to be valued to determine what portion belongs in the marital estate.
How that valuation works, and whether the other spouse can receive an ownership interest, depends heavily on many factors… Such as state law, the business structure, and any existing buy-sell agreement.
How is the business valued?
Once a spouse’s income comes mostly from a business they run, a divorce case has two tracks at once… The personal split, and a separate fight over what the business is worth.
Courts don’t value a business the way a buyer in a sale would. They use the framework in IRS Revenue Ruling 59-60, the foundational statement of factors for valuing closely-held stock, which the American Institute of CPAs’ (AICPA) own valuation standards build on.
That framework asks what the business earns, not just what it owns, and the earnings number usually decides the outcome.
What to do in the next 24 hours
Until you know whether an automatic restraint already applies in your state, take some precautions. Do not move money out of business accounts, change signing authority, or make any transaction outside the ordinary course of business.
Call a family-law attorney who has handled a business-owning spouse before, not a generalist, within the first day if possible, and ask one question: does my state’s restraint attach automatically at filing, or do I need to request one. Start gathering three years of tax returns, financials, and any buy-sell agreement now, before formal discovery starts.
Restraining order: what happens when you’re served
In California, Family Code Section 2040 writes the restraining order directly onto the summons, binding the filer the moment they file and the other spouse the moment they’re served, no judge required.
Neither spouse can transfer, encumber, hide, or dispose of any property, business included, without written consent or a court order, with narrow exceptions for ordinary business and necessities of life.
Texas works differently. Family Code Section 6.501 lets a judge grant a restraining order on request, but nothing restrains either spouse automatically statewide.
Several populous Texas counties, Dallas, Travis, Bexar, Collin, and Denton among them, have their own local standing orders effective on filing there. Tarrant and Harris do not.
A business owner in a county without one has no automatic protection until a temporary restraining order (TRO) is actually requested and signed.
| Factor | California | New Jersey | Texas |
|---|---|---|---|
| Automatic restraint at filing | Yes (Fam. Code 2040) | No | No; request a TRO or rely on a county standing order |
| Personal goodwill divisible | Only the enterprise share | Yes (Dugan v. Dugan) | No (Nail v. Nail) |
| Discovery response deadline | 30 days, 35 by mail | By county rule | By county rule |
| Best for | An immediate, no-request restraint | A spouse arguing personal goodwill has value | An owner arguing reputation isn’t divisible |
The court’s valuation approaches
Valuators reconcile three approaches.
The asset approach adjusts the business’s assets and liabilities to fair market value.
The market approach compares the business to similar businesses that actually sold, or applies an industry rule-of-thumb multiple.
The income approach capitalizes the business’s normalized earnings, usually owner’s discretionary earnings after adding back owner compensation above a fair-market wage and any personal expenses run through the business.
Example with real numbers
Take a business earning $120,000 a year in owner’s discretionary earnings.
Consider it was built up from a risk-free rate of 4.5%, an equity risk premium of 5.5%, a small-company size premium of 6%, and a 9% company-specific risk premium for a single-location, single-owner operation.
This lands on roughly a 25% discount rate. Subtract a 3% long-term growth rate and the capitalization rate comes out to 22%.
Divide $120,000 by 0.22 and the income approach alone lands around $545,000, with a reasonable range of $460,000 to $670,000.
Cross-checked against the market approach, where owner-operated small businesses commonly trade at 2.5 to 3.5 times discretionary earnings, the same business comes closer to $300,000 to $420,000.
A real valuator reconciles both and typically lands in the $400,000 to $600,000 band.
This is illustrative math on hypothetical inputs, not a substitute for an actual engagement.
Whether that number includes the owner’s personal goodwill, the value tied to their own reputation rather than the business itself, depends entirely on the state.
California’s Court of Appeal, in In re Marriage of Foster, held that goodwill built during marriage is community property, but later cases split it into two buckets: the enterprise share is divisible, the personal share is not.
New Jersey’s Supreme Court, in Dugan v. Dugan, held an attorney’s personal goodwill was divisible marital property outright.
Texas’s Supreme Court, in Nail v. Nail, went the opposite way and held personal goodwill isn’t divisible, since it attaches to the person, not the business.
What is the business has other owners?
If the business has more than one owner, check the partnership or shareholder agreement for a buy-sell clause before anyone else does.
Many multi-owner agreements name divorce as a triggering event: the interest gets sold back to the company or other owners, usually at a formula price set years earlier, instead of letting a court award the ex-spouse an actual ownership stake.
What not to do: mistakes that turn a divorce into a fraud case
This is the mistake that costs people most: quietly delaying invoices, inflating owner salary before filing, or picking a friendly accountant for a lowball number.
A forensic accountant’s discovery process, subpoenas, bank tracing, lifestyle analysis, is built to catch exactly this.
In California, spouses owe each other a fiduciary duty in any transaction touching community property under Family Code Section 721, and Section 1101 sets the penalty.
Concealing or undervaluing an asset can cost 50% of its undisclosed value, or 100% for fraud, malice, or oppression, plus the other spouse’s attorney’s fees.
An honest valuation almost always costs less than getting caught hiding one.
The 30, 60, and 90 day sequence
In the first 30 days, formal discovery requests go out for the business’s financial records; in California, the responding spouse has 30 days to answer, 35 if served by mail.
Retain a credentialed valuator in this window, not after, since their own document request, three years of returns, financials, contracts, receivables and payables, takes time to fulfill.
By 60 days, with complete records in hand, a full valuation report typically takes another 60 to 90 days, longer if contested.
By 90 days, expect either a settlement built around the valuator’s number, or a rebuttal valuator from the other side, common enough that it isn’t a sign the case is going badly.
If the marital estate includes retirement accounts alongside the business, dividing a retirement account after the decree runs on its own separate 90-day clock, worth tracking alongside the valuation.
And if you’re still inside the response window on the divorce petition, the deadlines for responding once you’ve been served matter just as much as the business.
Frequently asked questions
Does an automatic restraining order protect my business if I don’t live in California? Only if your state or county has one. California’s applies statewide the moment a case is filed. Most states, Texas included, require a spouse to request a restraining order, though many counties have their own automatic standing orders. Check with a local family-law attorney before assuming you’re protected.
I built all our clients’ relationships myself. Is that goodwill divisible? It depends on your state. California divides only the enterprise share of goodwill, not your personal reputation. New Jersey treats personal professional goodwill as divisible property outright. Texas treats it as not divisible at all. Same facts, three different outcomes depending on where the case is filed.
Can a court force my business to be sold to divide the money? Yes, if it’s the estate’s main asset and there isn’t enough other property to buy out the non-owner spouse another way. A buy-sell agreement with a divorce trigger clause is specifically designed to avoid this, forcing a sale back to the company or other owners at a set formula instead.
What happens if I find out my spouse hid business income? Document everything and tell your attorney immediately rather than confronting your spouse directly. In California, concealing or undervaluing a marital asset in breach of fiduciary duty can cost the spouse who did it 50% of its value, or 100% for fraud, malice, or oppression, plus attorney’s fees.
Do I need my own valuator if my spouse already hired one? In most contested cases, yes. A valuator retained by one spouse isn’t neutral, even when following the same standards, and a second opinion is standard once real money is on the table. Expect your spouse’s report to be a starting point for negotiation, not the final number.
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