'Double Dipping' and Business Valuations During Divorce

 Posted on May 04, 2017 in Division of Property

Double dipping comes in many forms and generally leaves at least one person upset. When it occurs during a divorce, a spouse is giving up an inequitable share of money or assets. “Double dipping” in divorce happens when a spouse’s income is used to determine both:

• The value of an asset during the division of marital property; and
• The amount given in spousal support payments.

Many states, including Illinois, try to prevent double dipping by not counting personal income as a marital property. During business valuations, distinguishing personal income from marital property can be difficult. A business is both a shared property and an individual income source. How you determine a business’ value can prevent double dipping.

Valuation Process

Assessors can take different approaches to determine the value of a business:

• The assets approach estimates the fair market value of the business’ tangible and intangible assets to calculate the price a prospective buyer would pay to purchase the business.
• Other methods, such as the income approach, consider the cash flow that the business creates as part of the business’ value.

Business valuation processes that use the cash flow can cause double dipping because a spouse’s personal income becomes part of the business’ value. A business’ actual and potential earning capacity can increase its value. However, the income stream going to a spouse is also one of the primary factors in determining how much that spouse owes in support payments. The asset valuation approach is more favorable to the spouse who runs the business.

Goodwill

When valuing a business’ intangible assets, assessors need to distinguish between the business’ personal and enterprise goodwill. Goodwill is how a reputation among customers can increase a business’ value. Goodwill comes from two sources:

• Personal goodwill is when the owner’s reputation and skill creates customer loyalty; and
• Enterprise goodwill is when elements of the business, such as its location or service model, attract customers.

It can be difficult to determine the source of a business’ goodwill. One method is to consider a hypothetical sale of the business. Would having a new owner affect how customers feel about the business? Enterprise goodwill is independent of the owner, making it more valuable if a business is sold.

The Illinois Supreme Court ruled that only enterprise goodwill should be included when valuing a business during a divorce. Personal goodwill is part of a spouse’s earning capacity, which can be considered when calculating spousal support payments.

Fair Valuations

When your income is counted as part of your business’ value, you may compensate your spouse twice for the same asset. A Kane County divorce attorney at Goostree Law Group can conduct a proper business valuation that protects you from double dipping. Schedule a free consultation by calling 630-584-4800.

Source:

http://www.divorcemag.com/blog/beware-of-double-dipping-when-valuing-a-business-during-divorce