Avoiding the Double Dip in Divorce

When a spouse owns a business and also pays support in a divorce, there is always a concern regarding double dipping. For instance, the owner of the business is generating post-separation income. The income may be considered in the business valuation, and the same income may be used for support purposes. This is referred to as double dipping.

Pennsylvania strictly prohibits double dipping, but how does a business owner spouse protect themselves by understanding and confirming that their income isn’t being counted twice? Normally, assets are valued in divorce as close to the date of distribution as possible. Although the date of separation sets the date for determining which assets are marital, the date of distribution is the date as of which assets are valued, taking into consideration post-separation contributions.

If a business is valued as of the date of distribution, is the non-business owner spouse then getting the benefit of the double dip? Isn’t this more of a concern if the non-business owner spouse doesn’t own a building or lacks inventory or other assets?

If your client hires a business expert to value the business, double dipping can be avoided. First, the business expert can normalize the business owner’s income. Normalization of income adjusts compensation to what a third-party buyer would utilize. Secondly, the business expert can deduct personal goodwill, which is the value attributable to the owner of the business based on personal relationships and industry knowledge. Deducting personal goodwill adjusts for future earnings and prevents income from being used in equitable distribution and again in support. Finally, a business expert may value the company by using other methods than the income approach.

Avoiding the double dip in divorce is necessary to calculate the marital estate and prevent the same income from being used in the business valuation and in support. Make sure you consult with a qualified business expert before going to support court or finalizing the divorce.