Doing Divorce Right By Chief PeaceKeeper™ Scott Levin

Divorcing with a Business in California? Understanding Income, Assets & Support Calculations

• Scott Levin Divorce Mediation Attorney

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Divorcing with a Business in California? Here's How Valuation and Income Affect Support

When you're dividing a business in divorce, one key rule matters: you can’t count the same money twice.

In this episode, California divorce mediator and attorney Scott Levin is joined by forensic accountant and valuation expert Sara Nanchanatt, owner of S.N. Forensics, LLC, to unpack the complex relationship between business income, valuation, and support obligations in California divorce cases.

We explore how courts treat business income, retained earnings, and owner distributions when calculating child and spousal support—and how to avoid double-dipping when dividing business value and determining income.

Whether you're a business owner, the spouse of one, or a professional navigating financial divorces, this conversation will help you understand how to protect your interests and simplify the process.

In this episode, we cover:

  • What counts as income from a business for support
  • How distributions, retained earnings, and salary are treated
  • When “double-dipping” becomes an issue
  • How a fair replacement salary is determined
  • Why agreeing on business value early can streamline everything

Learn more about Sara Nanchanatt and her firm at: www.snforensics.com

Need help with a business-owner divorce in California?
Schedule a free consultation with Certified Divorce Financial Analyst and Mediator Scott Levin at:
www.sandiegofamilylawyer.net/schedule


And learn more about dividing a business in California divorce here. 


Thanks for listening and I hope you'll continue to learn more about how you can peacefully divorce.

As a divorce mediation attorney in California, Scott Levin helps couples figure out the settlement terms and draft enforceable settlement agreements so they can divorce fairly without needing to go to court. Obtain closure peacefully through an amicable divorce. process that protects families and kids.

Visit San Diego Divorce Mediation for more information and to learn more about our mission to help divorcing couples make informed decisions and fair agreements through mediation or book a free virtual consultation.

Scott Levin, attorney, mediator, CDFA®
Chief PeaceKeeper
scottlevinmediation@gmail.com
858-255-1321
San Diego Divorce Mediation & Family Law
www.SanDiegoFamilyLawyer.net




Speaker 1:

Hi everyone. I'm Sarah Nonchanot. I'm the owner of SN Forensics, a boutique forensic accounting and business valuation firm. I'm here with Scott Levin and we're excited to talk to you about some of the different aspects of business and income available in the divorce proceedings.

Speaker 2:

Yeah, thanks so much for joining Sarah. This is exciting. I think we'll give some good information. I'm Scott Levin.

Speaker 2:

I'm a family law attorney and a CDFA, but I help people primarily as a mediation lawyer in California and a lot of my cases right now involve business ownership and there's kind of twofold, like there's the side of the business dealing with the business and a divorce as an asset. So one spouse is going to end up with the business. They have to buy the other out. What are, what is the value? What are the numbers? How do we deliver it? So that's a whole. That's, I know, that's your world. Another sub issue which is really like a very, very, very important and I think, often not really understood by our clients or, more specifically, other professionals, is you know how does business income impact? You know the child and spousal support, you know calculations and calculus to arrive at those figures, and I guess I just wanted to throw out that topic and see what you know. Kind of take us down that road and I'm sure I'll have questions, but that's a really, really important issue.

Speaker 1:

Yeah, it definitely is, and you know everything is a little bit different in each state, each type of business. But in general there are two components to the business valuation that impact the asset that can be divided in the divorce and then also the income that can be considered for spousal or child support. So when you do a business valuation you take what is the net income to the business. There are some, you know, different expenses we put in, we take out and then we also look at what the owner replacement salary is. And so as some people own smaller businesses not everyone maybe takes a salary. They take the distributions. So we use data to give us the you know, accurate for the geographic area, the type of work they're doing, how many hours per week they're working, and we pull that out of our calculation when we go to do the business valuation. So what that means is that's kind of a separate component, so that salary could be considered for income for child support or spousal support.

Speaker 1:

And then when you do the business valuation, you can use historicals, you can use a lot of different methods, but really what you're looking at is the present value of the future cash flows of the business. So that's based on you know kind of the net income, the distributions depending on the business type, and what's really important is that is included in the asset calculation. So many practitioners like myself believe that it would be double dipping to count that money also in the income available for support for child or spousal support, and so all of our calculations we have that salary we pull out also in the income available for support for child or spousal support, and so all of our calculations we have that salary we pull out. That's what we really believe. You know they could be earning as a salary. We can talk about that for support. But when it comes to if you're dividing the business and you're taking a cash payout, that distribution income I don't believe should then be recounted in the support calculations as well.

Speaker 2:

What about if two parties arrive at a settlement for the division of a business, so they reach agreement on how much the business is worth and how much, you know, the non-owning spouse will receive? What if the business pays? What if the distributions, uh, from the business immediately pay that person that amount? Is that touching on any like community versus separate property? Like the payments are coming from the actual business, but were they accounted for? Does that make sense?

Speaker 1:

Yeah, I think it makes sense and that is accounted for in the calculation. You know, one of the things that's challenging in the business valuation space is you're not necessarily talking about physical cash all the time. You're talking about what the business earned, but maybe that was spent somewhere else at some point in time and it's not physically sitting in the bank account as we're doing the valuation, but it still can be paid, you know, from those distributions they can pay it from their salary. You know, wherever the physical money comes from is different than you know the calculation of the theoretical division, so to speak.

Speaker 2:

And so the the replacement value that you're really focused on primarily in assigning the income to the business owner, is that usually accounted for as just like gross W-2?

Speaker 1:

So it really depends when we look at the business valuation. So take an S-corp, for example. An S-corp usually has sole ownership. The reason that they're structured that way is simply for tax purposes and, let's be honest, not everyone takes the required salary that they're supposed to pull out. So part of what we do is we normalize that number to what we would expect. So if you're a sole business owner, we're going to take into consideration. You're doing the bookkeeping, you're doing the marketing, you're doing all these things, and what would you have to pay other people in your region to do that? To fully put together the picture of what your compensation package should be versus what you're actually taking yeah, interesting.

Speaker 2:

I think this is great information. Let's just keep it rocking. I got another one for you. So a business is acquired by. So a business is kind of held by an older person, a younger. You know, hustler acquires the business while married with to his wife and the business over the last 18 months or so really, really ramping up because of the, presumably because of the more you know, the new energy, uh. But lawyers involved in this case want to use a historical perspective of it, of of what's been happening over the last five years, to get kind of an average. Uh, would an event like that like 18, 24 months ago and then a spike in success? Would that be a reason not to go beyond those two years?

Speaker 1:

So we do it a couple of different ways. Whether we're doing an indication of value or a conclusion of value, we look at both the income and the market approach. So when you're looking at the income approach, you are doing that capitalization of earning streams. What we tend to do is weight do a weighted approach where we weight the most recent years higher. So, for example, if it's five years of income, we would do the most recent year times five, the year before, times four and kind of. You know that helps to balance out some of the historical irregularities that could occur.

Speaker 1:

The other is we also use the market approach where we can use an industry rule of thumb, such as an EBITDA multiple. We also look at private transaction data and by doing all of this we try to make sure our numbers are in line with industry averages. Of this, we try to make sure our numbers are in line with industry averages. So if we do your income approach and it comes back at like $100,000, but the industry is telling us $400,000, we know there's something off and we have to see okay, are you taking more expenses than you should be? Is there some historical event like you referenced that's impacting this? And that's kind of a way for us to sanity check to also make sure we're on the right path.

Speaker 2:

What do you find is the biggest struggle for parties themselves that are going through a divorce in regards to you know that involve a business and business ownership and business buyout.

Speaker 1:

Yeah, I think it's a couple of things. So I'm in New York, which is an equitable distribution state, and so I think it's really challenging to decide what that equitable percentage is. You know someone, especially these small family businesses that spouse has maybe held it for 20 years, really worked in on it, and it's hard for them to agree on a percentage that they would divide this business by and the other and I just had it happen last week is the reference I made to the double dipping of using the distributions for alimony and child support and also for the business valuation. It's really hard and you know different experts will say different things, but in most states it is considered double dipping and that's sometimes a hard pill to swallow.

Speaker 2:

So if a business, so if a business owner is hesitant to kind of bring on the valuation company and your services because they fear the fees, really they could be harming their own outcome by not having a true professional make the analysis. Yeah, and in mediation they're going to kind of have to come up with whatever they can agree on without knowing what they don't know, and the mediator will just sit there saying why don't we bring in somebody? Why don't we bring in somebody? I'd feel better if we brought someone in. But you know that fear of fees though. I mean, if you double dip you're talking about hundreds of thousands of dollars. Presumably that would go out the window.

Speaker 1:

Yeah, and I think that that is really important and that's one of the things that we try to really work on at our firm is, especially in the mediation space, what is an affordable amount that makes the business valuation worth it. So we offer kind of lighter approaches, which is either an agreed upon procedures or an indication of value. And, truth be told, I would say, if the business value is more than $10,000, our fees, you know, make up for themselves by having that clarity of what is this correct number, what are all the levers we used. Because really, when you go into these conversations, you want to have as much knowledge and information as possible and you don't want to have that like what if I left something on the table? Kind of nagging at you.

Speaker 2:

Absolutely, absolutely. It's a big, big issue in mediations where there's a downward pressure on, you know, costs and affordability, weighing that against. Of course, you know, knowing like let's get certainty, like let's just figure this out. So we're not going to guess and I don't want to hear from anyone four years from now about X, y or Z either, you know. So it's. It's almost something that you, as a mediator, you kind of have to almost insist on it, unless it's just, you know, going to put someone into bankruptcy, which it's not, given your fee structure. But these are. There's so many more questions and little issues that come up. Right now I have a case involving a personal injury firm and there's question is like there's so many ways to address that, those cases that will be paid out in the future but that were acquired while they were married, and how to account for the legitimate expenses incurred and maybe what's not. I mean, there's so many unique issues that come up and I'm just thankful to know you and be able to rely on you.

Speaker 1:

Thank you and, truthfully, we're always happy to have a consultation, especially in mediation. We love to be engaged as a neutral by both parties so that you're not both paying for your experts. We have one person we agree on. We always do our work independently and objectively and just try to add that information and peace of mind to the sessions.

Speaker 2:

Yeah, thank you so much. You do wonderful work and it's a real benefit to people going through divorce, whether you're mediating or choosing the alternative.

Speaker 1:

Yeah, of course. Thanks so much for having me. It's great talking with you.

Speaker 2:

Thank you guys.

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