November 28 , 2016

Business Value and Divorce: Double Dipping Part II

The Income Approaches to Business Valuation can use past income, with appropriate adjustments, as well as a projection as to what the future income will be based upon a review of the historical earnings of the company. However, whether one is applying an Income Capitalization approach to valuation or a discounted earnings/cash flow valuation methodology, the earnings to be capitalized are the beginning point of future earnings [but not necessarily an indicator of what future earning will be].

If the court bases spousal support upon the actual salary paid instead of on the adjusted reasonable fair market value compensation, the opposing spouse would be unjustly compensated because his/her support isn’t being calculated using the same compensation amount used to calculate the business valuation. Remember compensation adjustments usually, but not always, result in a higher value for the business. When adjustments are made, the higher compensation value has already been capitalized through the business valuation and is being equitably distributed through a spouses share of business. If support is calculated using the un-adjusted compensation amount, there is double-dipping into the business.