Three Tips For A South Dakota Business Owner Going Through A Divorce (Part 2)

Tip #2 - How do you reconcile the valuation of the business, its equitable distribution, and support obligations?

Under certain circumstances, you may need to adjust the business’s value from the marital estate. This “double dipping” may occur when a spouse receives double recovery for a single asset. For example, a court may decide that it’s unfair for a spouse to receive maintenance payments based on his or her spouse’s future income, in addition to a share of the value of a business. In other instances, the value of the business may be determined with a cash flow that is net of a reasonable officer’s compensation to avoid double counting.

Tip #3 - Is the business owner deceptive when reporting income?

A controlling shareholder spouse may try to conceal income or assets to achieve a more favorable divorce settlement. Downplaying assets and income (or, conversely, exaggerating liabilities and expenses) can lead to a lower business valuation and reduced payments for child support and alimony – unless a valuation expert identifies the difference and makes an adjustment to record the value of the missing or inaccurate item(s).

Reasonable “replacement” compensation, based on the market value of the owner’s contribution to the business, is a common adjustment that’s made in divorce cases. Also, some business owners try to deduct their personal attorney’s fees or expert fees as business expenses. Running these and other personal expenses through the business not only reduces the value of the business interest, but it could also expose the non-controlling spouse to an IRS inquiry.

Other adjustments may be needed to normalize the income stream to benchmark the subject company against comparable companies. Examples include adjustments for nonstandard accounting practices, such as cash-to-accrual basis of accounting changes, and for nonrecurring income or expenses from, say, a discontinued product line or sale of a non-operating asset.

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Brooke Swier Schloss
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Family Law and Estate Planning attorney helping families across South Dakota plan and protect their loved ones