November 16 , 2016

Business Value and Divorce: Double Dipping Part I

Business Value is one of the issues frequently considered in divorce cases. That is the business value to assign to a spouse’s business interest for asset division purposes. A business owner's salary (and draw) will reduce the net income or cash flow produced by the businesses's performing assets. Other major parts of a divorce negotiation are the income payments from one spouse to the other: alimony and child support. A business owner's competitive salary (and draw) can and should reduce the net income or cash flow produced by the businesses's performing assets. This must be reconciled with the individual income that may be used for support calculations.

  Double Dipping

The “double dipping” concept that flows from business valuation methodologies can sometimes create inequities when addressing the separate yet interrelated issues of alimony and child support. The concept of double-dipping is a significant issue to be addressed by the court. Avoiding the potential inequities resulting from the double dip can significantly alter the value of a spouse’s business interest and can lead to dramatically different results. The concept of double-dipping refers to the double counting of a marital asset, once in the property division and again in the support award. The same cash flows capitalized to determine the present overall value of a spouse’s business (an asset subject to equitable distribution) are sometimes also considered a component of that spouse’s total income for support calculation purposes. More specifically in the context of divorce proceedings, where the court uses a business owner’s “excess earnings” to value the business and also fixes support based upon that spouse’s total income (inclusive of the excess earnings used to value the business), a double-dip can occur. In order to fully understand the double-dip issue, an understanding of basic business valuation theory and methodology is required. This is discussed in Part II