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How to Avoid Double Dipping When Valuing A Business In Divorce

If one spouse owns a business or the couple owns a business together, divorce can quickly become very complicated. In many cases, double dipping occurs. According to a recent article in Divorce Magazine, this is when the business is counted as a piece of property for the purposes of asset division and then counted again for determination of spousal support. Care must be taken to avoid this.

Business Valuation And Double Dipping

In order to avoid double dipping, you must be diligent during the process of valuing the business. Keep in mind that the valuation of a business encompasses several factors, such as:

  • The business's income stream
  • What the business owns - tangible property, intangible property
  • How much the business owes (liabilities)

When addressing double dipping, the focus is on the business's income stream. It is this aspect of the business that may be included in calculation of assets for the purposes of property division and then included again in calculation of the owner's income stream for purposes of spousal support payments.

Understanding Valuation Methods

Understanding valuation methods can be helpful in determining how double dipping occurs and how it can be avoided. There are more than a few methods that can be used to determine the value of a business. However, the two most frequently used methods are: the market approach or the book value.

The market approach is founded on the market value of the business or the earning capacity. Simply put, this is what an investor would consider a fair amount for purchasing the business, considering the earning potential.

The book value is based on the value of the liabilities and assets as they appear on the books. Minus the depreciation in value caused by wear and tear and age, as well as the potential for an increase in the value of the business.

How to Avoid Double Dipping

On the surface, the book value downplays the business's income stream and thus, depending on other factors, may be more likely to minimize double dipping. However, every scenario is different. It is important that you work with a lawyer who is knowledgeable in the nuances of business division in order to minimize your losses and protect your assets. At Stephen T. Holman, P.A., we can help you address these and other complexities that arise during the divorce process.

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