When a business owner files for divorce, they can generally anticipate a more complicated and contested process when ending their marriage. A business can create numerous challenges for a divorcing couple, including negotiating how to run the company after divorce and how to share the fair market value of the business between the spouses.
When the value of a business lies in the income it produces, that income comprises the value of the business as well as the income available to the owner. In scenarios where there may be an order of alimony or spousal support in play in addition to the division of marital property, a double dip can occur, leading to major disputes between the spouses. What do people mean when they reference a double dip in a divorce involving a business?
A double dip means counting future business income twice
It is a surprisingly common practice for the spouse who does not hold a direct ownership or managerial interest in the business and who does not wish to retain it in the divorce to try to benefit from the income of the business twice. What this means is that income that is capitalized to determine the marital value of a business is the same income used in the calculation of spousal support. This can be looked at as counting the value of the business twice when trying to settle the economic issues for their divorce.
The company’s value will guide other property and debt division decisions. People may also request alimony or spousal support based on the future revenue that the company will generate. However, the current business valuation is a reflection of not only the company’s assets but also the future income it will produce.
Therefore, in many cases, it would be inappropriate to factor in future earning potential twice for the financial discussions in a divorce. The one exception would involve when a claim against the future earning potential would amount to the repayment of somebody’s previous investment, rather than returns on that investment. Someone who has contributed to the business could potentially request support based on future income to recoup certain investment.
Getting a business valuation right is critical
Those preparing for a divorce and hoping to protect what they have invested in their company and built in the organization that they operate need to be aware of common tactics or mistakes in divorce that would put them at a financial disadvantage and how to protect their interest in the company throughout the divorce.
The process of putting an appropriate fair market value on a business that reflects asset depreciation and liabilities, in addition to future income, is crucial for the protection of the business and its owner(s). Seeking legal guidance to learn more about business valuation and how it may influence the outcome of divorce proceedings may benefit those who have purchased or started a business during their marriage.