Divorcing business owners in New York often focus on the problem of dividing their business or professional practice according to the state’s equitable distribution rules, but a more subtle issue can create lasting financial harm: the risk of a “double dip.”
In the absence of a prenuptial or postnuptial agreement that creates a carve-out, one spouse’s business – which was started, grown or supported during the marriage – may be at least partially marital property. Before each spouse’s share can be allotted, there usually must be a formal valuation process.
Calculating the fair market value of a company or professional practice requires an analysis of the organization itself, the market and other economic factors. There are numerous different valuation methods available, and selecting the right one can be a challenge. In some cases, the valuation method used includes future business revenue as part of the calculation process.
The problem arises when those same future earnings are then used again to calculate spousal support. This is known as a double dip. Essentially, the dependent, non-owner spouse benefits from the inclusion of future income in the business valuation when the marital property is divided, then seeks to use that same income stream as the basis for post-divorce maintenance payments. Factoring in the same income twice creates an unfair burden on the spouse who retains the business and eventually earns that income.
Courts in New York have addressed double-dipping in various ways, but the issue is highly fact-specific. Whether a particular outcome is fair often depends on how the business was valued and how income is characterized for support purposes.
For business owners, the key is to recognize the risk early. The valuation method selected can directly impact future support obligations, and once those numbers are set, it can be difficult to unwind the consequences.
Other financial pitfalls for divorcing business owners may include the following:
- Failing to account for business asset depreciation
- Overestimating future revenue or growth projections
- Disagreeing on the separation of enterprise and personal goodwill
- Continuing to employ a spouse without clear contractual terms
Those hoping to maintain sole ownership of their companies or professional practices typically need guidance from the earliest stages of divorce onward. Complex divorces involving high-value resources, alimony requests and disputes about valuation make representation from an experienced attorney necessary.
Bryan L. Salamone and Associates P.C. is the Long Island divorce leader because we help New York business owners and others anticipate the issues that could have a major impact on their marriage dissolution proceeding. To speak with an accomplished attorney, please call 631-388-6009 or contact us online.