Privately owned businesses are frequently considered a part of marital estate when it comes to married couples in the process of divorce. Usually, a formal business valuation is needed to obtain the value of a privately owned business. Unsurprisingly, business valuations are almost always complicated. However, in some cases, "double dipping" can make the valuation process even more complex.
What Is "Double Dipping"?
The term "double dipping" refers to when the value of an asset is counted twice. The value of the asset is counted once in the division of property and once more as a stream of income.
Double dipping is most common when it comes to retirement assets, which are typically divided under a property settlement. In many cases, the party receiving spousal support will ask to have a portion of the additional income included as support. However, a shrewd advisor will realize that the income stream was accounted for in the valuation process. Therefore, if an individual receives an increase on top of the spousal support they are already getting, it would be like permitting the individual to have a "double dip."
How does the double dipping concept apply to a closely held business?
When it comes to privately owned businesses, the stream of income that a business generates is a big factor in terms of the overall value of the company. The income stream is already considered when a business' value is divided. Double dipping is when the stream of income of the business is used more than once to calculate spousal support.
In order to prevent double dipping, it is a good idea to use methods that emphasize other components of a business besides the income stream. For example, a valuing approach that focuses on liabilities and assets is ideal for a privately owned business. That way, income stream can be considered when calculating spousal support without any worry of double dipping.