When married partners are contemplating divorce, many complex issues must be handled during the divorce process. These can include child support, child custody, and the distribution of marital assets.
In cases where the divorcing couple owns a business, either jointly or individually, the divorce process becomes even more complex. Often, a business owned by one or both spouses is the most valuable asset involved in property division (along with retirement benefits and pension plans).
Dividing a business in two so that each spouse gets half is tricky. The business will have to be evaluated by an expert in the field who can calculate the business’s financial worth. “Double-dipping) occurs when the same income or cash flow is used twice – (1) to calculate the distribution of assets and (2) to calculate support payments such as alimony or spousal support.
What Does “Double-Dipping” Mean in a Divorce Context?
“Double-dipping,” sometimes referred to as “double counting,” is a term that refers to the situation in which one spouse gets paid twice for a single asset. If a marital asset is counted twice, first during the property division and then again when calculating the amount of spousal maintenance (“alimony”), this will likely be considered double-dipping.
Double-dipping in divorce cases commonly occurs when dividing intangible assets. These assets may include retirement benefits, pension funds, and business interests such as business goodwill.
An example of double-dipping: the parties determine the value of a business by projecting the future income the business is expected to generate, and they count that as an asset to be divided in the divorce proceedings. They then consider determining a spousal maintenance award and use the same business income stream to calculate the alimony.
In the first step, they converted an intangible asset (future income) into a tangible asset (the valuation of the income stream) and again as a tangible asset (the valuation of the same income stream) when calculating alimony. This is double-dipping, and it is not allowed.
How do Courts Avoid Double-Dipping?
If the property division includes a business’s projected income stream, there can be no maintenance based on that same income stream. The way around this is to use a different valuation method to place a value on the business: by using an asset approach. Future projected income is not considered part of the valuation calculation. The business’s current assets are added up, debts are subtracted, and the result is a net total value.
An asset within the business itself need not be tangible to be included in the valuation. For example, the values of patents, copyrights, and trademarks are included in the valuation, and so are products and intellectual property currently in development. The business’s future earnings are not considered using this method of valuation. Only the current value is taken into account.
What is “Goodwill”?
“Goodwill” is a term used to describe the primary intangible assets of a business, which generally includes illiquid assets that have value but are hard to calculate and physically inspect. Goodwill assets may include, but are not limited to, a business’s intellectual property (trademarks, copyrights, customer lists, and patents, for example), reputation, or brand recognition.
Goodwill can also include good employee relations or good customer relations. Businesses have goodwill, and goodwill can also be attributed to an individual, which is generally referred to as personal goodwill. For example, if one of the spouses in a divorce is a celebrity, their future earning potential associated with their name, skills, or reputation will be classified by courts as personal goodwill.
How is Goodwill Calculated in Divorce?
It is important to know the differences between personal goodwill and business/enterprise goodwill. In most states, goodwill attributable to the individual is not part of the marital estate and is not subject to division. On the other hand, goodwill attributable to a business entity is commonly treated as part of the marital estate and is subject to division in divorce.
One way to measure goodwill is to calculate the difference between the purchase price of a company and the fair market value of the company’s identifiable assets and liabilities. Whatever portion of the business’s value isn’t found in the assets must be attributable to goodwill. For example, if a company has a fair market value of $10 million but is valued by expert appraisers at $15 million, then $5 million in goodwill exists.
Note that calculating business goodwill will depend on your local jurisdiction. Expert witnesses are often hired and utilized by both parties to submit their calculations of the business goodwill.
Some of the factors that a state may consider when distributing goodwill as a marital asset include:
- Whether the business was created or acquired before or during the marriage
- How involved each spouse was in managing and operating the business
- The amount of personal goodwill involved in the business’ valuation versus goodwill solely attributable to the business. For example, if a company is valued at $10 million, but $2 million of that is attributable solely to one of the spouse’s personal goodwill (such as their unique business skills or business relationships), then only $8 million will be included in the marital estate
- The length of the marriage
- Whether spousal support will be ordered
Generally, courts prefer to calculate business goodwill on a case-by-case basis. This means that even in the same jurisdiction, calculations of business goodwill can vary widely with each case.
How Do Courts Avoid Double-Dipping Goodwill?
There are several ways in which a court may avoid double-dipping for goodwill during the pendency of a divorce proceeding. For instance, a court may exclude business goodwill when determining the shared marital estate. This is especially true in cases where spousal support is ordered, as courts will use business goodwill to determine alimony.
Further, a court may treat the business as if it were dissolved at the time of the divorce filing and divide the business equally between the two spouses per the state’s property laws. Some courts may even treat the business goodwill and future income as spousal support.
However, the aforementioned solutions to double-dipping also have drawbacks. For example, if business goodwill is simply treated as spousal support, both parties must agree on that arrangement. Thus, many courts are reluctant to issue a spousal support order based solely on a business’s goodwill, especially given that businesses sometimes come to an end, and thus the alimony would end too.
Should I Hire an Attorney for Help with These Divorce Matters?
As can be seen, double-dipping and goodwill in divorce proceedings can be extremely complex. An expert witness must often be hired to help calculate the amount of business goodwill and other parts of a business valuation. Thus, consulting with a knowledgeable and well-qualified divorce lawyer is in your best interests.
An experienced divorce attorney can advise you on how your state laws affect the distribution of your property and assets. They can also advise you on how you may avoid the issue of double-dipping. Additionally, they can hire and team with expert witnesses and represent you in any court hearings or alternative dispute resolution procedures.
