When divorcing parties are required to value a business for equitable distribution purposes, there is an additional equitable valuation issue to consider, commonly referred to as “Double Dipping.” This term refers to the potential of the business asset being used to derive both equitable marital property value and as well as used to derive the income stream used for spousal support. Note that child support is not part of any double dipping consideration.
Consider the following: In order to value the business asset, compensation is normalized or reflected as market compensation. The compensation over and above the market compensation determined is treated as part of the owner benefit stream capitalized as part of the goodwill aspect of the business valuation. Thus, the valuation of the business is based on a lower market compensation. If future spousal support payments are based on the non-normalized compensation, this results in the double counting the excess compensation twice! Once for value and once for income stream used to determine spousal support.
A method of resolving this issue in New York State has been to discount the potential 50% allocated to the equitable division of the business value in order to reflect the estimated effect of double dipping. An interesting issue emerges when the business value is increased by excess working capital or the value of other assets incidental to business operations. These incidental assets will increase the business value, but have nothing to do with and should not be considered for double dipping purposes. Any discount afforded to the equitable distribution of the incidental asset of this business needs to be carefully addressed and excluded from the estimated double dipping discount.
For example, if the value of a business is $1,000,000 due to $700,000 of goodwill increased by a $300,000 marketable securities account that is not required for normal working capital needs, the $300,000 should be considered as a 50% allocable portion of the business value and not discounted. Consideration needs to be given to the various components of value in determining double dipping aspects in division of the business pursuant to a valuation for equitable distribution purposes.
Dennis P. Kremer, CPA/ABV/CFF/CGMA/CVA