Distribution Navigating Application and Defense of Valuation - - PowerPoint PPT Presentation

Divorce and the Impact of Business Valuations on Support and Equitable Distribution

Navigating Application and Defense of Valuation Discounts and Complexities of Personal Goodwill

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Tuesday, May 12

Presenting a live xxx-minute webinar with interactive Q&A Gunnar J. Gitlin, Attorney, The Gitlin Law Firm, Woodstock, Ill. Anne Marie Jackson, Principal, Ain & Bank, Washington, D.C. Sarah McCormack, Partner, Hoelting & McCormack, Atlanta Martin S. Varon, Principal, Investigative Accounting Group, Marietta, Ga.

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4

VALUATION DISCOUNTS AND PREMIUMS – BEYOND THE BASICS

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com

5

In divorce valuations, often a significant issue is not value of the business, itself, but the discounts applied to the value. The main discounts to be reviewed are: Minority Interest (Control Premium) and Lack of Marketability.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 6

Will learn how to analyze all of the key discounts and premiums: Includes critical issues:

 Key Revenue Rulings  Discounts and Premiums 101/102.

 Control Premiums/Minority Interest Discounts  Lack of Marketability Discounts

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 7



Revenue Ruling 59-60: Little discussion of discounts. Does address key person discount issue – discussed later.



Revenue Ruling 77-287: Early Revenue Ruling addressing lack of marketability discounts.



Revenue Ruling 93-12: Revenue Ruling doing away with so called “family attribution doctrine” previously promoted by I.R.S.

 Allows application of minority interest discounts to

partial transfers even when a family owns overall control

• f a closely-held business.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 8

 Revenue Ruling 59-60: Little discussion of

• discounts. Does address key person discount

issue – discussed later.

 Revenue Ruling 77-287: Early Revenue Ruling

addressing lack of marketability discounts.

 Revenue Ruling 93-12: Revenue Ruling doing

away with so called “family attribution doctrine” previously promoted by I.R.S.

 Allows application of minority interest discounts to

partial transfers even when a family owns overall control of a closely-held business.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 9

Key Concept is relationship between nature of ownership interest from marketable, controlling interest to non- controlling, non-marketable interest upon valuation discount.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 10

STRATEGIC VALUE CONTROL VALUE FREELY TRADED VALUE OR MARKETABLE, NON-CONTROLLING NON-MARKETABLE, NON-CONTROLLING

Strategic Premium/Merger Economics Lack of Control Discount Lack of Marketability Discount Premium for Control Obtain indirectly by reference to control values via strategic premium Obtain indirectly by reference to freely traded values via control premium Obtain indirectly by reference to control values via lack of control discount Obtain indirectly by reference to freely traded values via lack of marketability discount

Source: Based on Z. Christopher Mercer, "Understanding and Quantifying Control Premiums: The Value of Control vs. Synergies of Strategic Advantages, Part II," The Journal of Business Valuation, p.51.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 11

Type of Ownership Interest

Example

Valuation Premium / Discount Illustrative Premium / Discount % Illustrative Impact

• n Value

Marketable Control 100% interest for sale to a strategic buyer Synergistic Premium (Not FMV)

+15% $115

Marketable Control 100% interest for sale to any willing buyer No Discount

• r Premium

None $100

Marketable Noncontrol Minority interest in a publicly traded company Discount for Lack of Control

• 20%

$ 80

Nonmarketable Noncontrol Minority interest in a private company Discounts for Lack of Control and Marketability

• 30%

$ 56

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL, www.GitlinLawFirm.com 12

 Control Premium: Additional consideration

investor would pay over a marketable, minority equity value (publicly traded stock prices) to own a controlling interest in the common stock of a

• company. Premium may include components for

control and synergy.

 Lack of Control Discount (a.k.a. Minority

Discount): 50% interest may have lack of control discount although not a minority interest. Neither control nor minority position.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 13

 “There are 51 shares ... that are worth $250,000.

There are 49 shares that are not worth a ----.” (See Humphrys v. Winous Co., 133 N.E.2d 780, 783 (Ohio Sup. Ct. 1956) quoting from John H. Doyle, speech before Ohio State Bar Association, July 1893).

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 14

 Control versus minority interest not an all or

nothing concept.

 Examples:

 Set corporate policy;  Appoint management;  Determine compensation for management;  Determine perqs of management;  Acquire or liquidate corporate assets;  Declare and pay dividends; etc.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 15



100% Control.



Slightly Less than 100% Control: Minority interest may be a nuisance.



Less than 80% control: Cannot consolidate financial statements for tax purposes.



Two-Third Interest: About one-third of the states require more than a 50% (plus one share) vote to approve certain major corporation actions (see chart in written materials). This may be known as super-majority. The various states’ statutory positions on this issue will have an affect

• n the degree of control.



50% Interest: This interest is neither a control nor minority position. Such a shareholder has the power prevent actions but generally does not have the authority to control action of the company.



Swing Vote - Minority block: This depends upon the distribution of the stock. The relationship between the persons owning other stock may have a value on the swing vote. Example: 1/3 int. to three owners subject to lesser discount.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 16



Attempt to indirectly examine the range of premiums buyers pay for a controlling interest in a public company.



Two Sources of Data – Compare public market trading prices before announcement of a merger or acquisition to the merger or acquisition price:

 Mergerstat Review:

 Publishes annual average control premiums for

about 50 broad industry groups. These are averages and exclude negative premiums (takeovers at discounts from previous publicly traded prices).

 Mergerstat/Shannon Pratt’s Control Premium Study

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 17

Mergerstat Review:

 Publishes annual average control premiums for about 50

broad industry groups. These are averages and exclude negative premiums (takeovers at discounts from previous publicly traded prices).

 Mergerstat/Shannon Pratt’s Control Premium

Study

 Online database: all takeovers of public companies

resulting in over 50% ownership since 1998. One feature

• f this publication is that the transactions are labeled as

Financial, Horizontal Integration, Vertical Integration or

• Conglomerate. May help in assessing the degree of

synergy reflected in the control premium.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 18

Year Average Control Premium Median Control Premium Calculated Minority Discount 2007 31.5% 24.7% 19.8% 2006 31.5% 23.1% 18.8% 2005 34.5% 24.1% 19.4% 2004 30.7% 23.4% 19.0% 2003 62.3% 31.6% 24.0%

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 19

 Exclusion of Negative Premiums from Averages:

 Effect is to exaggerate averages

 References to Averages Versus Mediums:

 Averages distorted by a few very high premiums

paid.

 Control Transactions May Consider Investment

Value:

 a/k/a “strategic,” “acquisition,” or “synergistic”

value

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 20

 Normalization process may include two types

• f adjustments:

 Adjustments which may take into consideration

elements of control

 Other adjustments.

 Often valuator may make adjustments to

business int. only a control owner could make and then also apply minority interest discount.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 21

 Illiquidity Discounts:

 Apply to Control Interest.

 Lack of Marketability Discounts:

 Apply to Minority Interest.

 Terms generally measure same thing but the

amount of discount significantly differs.

 Much greater discounts for lack of marketability for

a minority interest.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 22

 Two Types of Studies: Early Restricted Stock

Studies and Later Pre-IPO Studies

 Restricted Stock Studies  Usually restricted for period of two years.

Restricted stock may occur in various settings:

 Closely-held Company’s Sale of Unregistered Shares:

Often done to raise capital.

 Shares Issued When Company Acquired: When this is

done the stock issued is often unregistered and is subject to restrictions on its sale.

 Unregistered IPO Shares: Often underwriters of an IPO

request that some of the stock not be registered at the time

• f the public offering.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 23

 Positives

 Since marketability is the only difference between

restricted stock and freely traded stock, studies of such stocks are often used to measure the lack of a marketability discount to be applied when valuating a closely-held corporation.

 Negatives

 Because the short time period in which the

restrictions on such stock expire, shares of closely- held stock are expected to require a higher marketability discount compared to the restricted stock of a publicly traded company.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 24

Study Years

• Avg. Discount

SEC 1966-1969 25.8% Gelman 1968-1970 33.0% Trout 1968-1972 33.5% Moroney n/a 35.6% Maher 1969-1973 35.4% Std Research 1978-1982 45.0% Willamette Mgmt 1981-1984 31.2% Silber 1981-1988 33.8% FMV Opinions April 1992 23.0% Mgmt Planning 1980-1996 27.1% Johnson 1991-1995 20.0% Columbia Fin 1996- Apr 1997 21.0% Columbia Fin May 1997-1998 13.0% LiquiStat Database Regularly Updated “Almost fits into separate category.”

25

 Beware of Averages Redux:

 While average discounts in the restricted stock studies are

consistent, virtually all of the studies have a huge degree

• f variability with the highest discounts being more than

80 percent or 90 percent and with the smallest discounts actually representing a positive number, i.e., a premium.

 Studies Show Greater Discounts for Smaller

Businesses:

 Management Planning Study: Median 32.7% under 10M

but 17.0% for larger businesses.

 New Studies Not Likely:

 Due to one year restriction.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 26

 Example Period:

 April 2005 to January 2007:

 Average Holder Period Shares Sold in Secondary

market: 138 days. Shorter than in Restricted Stock Studies.

 Surprisingly: Significantly higher discounts.  Average and Median: 32.8% and 34.6%

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 27

 Importance of Studies:

 Benchmark to determine the difference between the

value of stock in private transactions before going public relative to the market prices following the initial public offers.

 Two significant series of studies:

 Emory Pre-IPO Studies  Willamette Management Assoc. Pre-IPO Studies

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 28

Study Years # of

Transactions

Average Discount 1997-2000 266 50% 1995-1997 84 43% 1994-1995 45 45% 1991-1993 49 45% 1990-1992 30 34% 1989-1990 17 46% 1987-1989 21 38% 1985-1986 19 43% 1980-1981 12 59% All Studies 543 46%

29

 Positives:

 Studies show higher discounts than restricted stock

studies: better measures effect of marketability. Those with restricted stock know restrictions will expire at end of term.

 Negatives:

 Pre-IPO studies likely measure more than only a

discount for marketability and he correctly suggests that there are multiple enhancements experienced by a company going public

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 30

 Mercer’s Position:

 “Comparing pre-IPO discounts with marketability

discounts is like comparing apples to oranges.” See, Christopher Mercer, QUANTIFYING MARKETABILITY DISCOUNTS (1997) pp. 89-91.

 Qualitative Marketability Discount Model.  Model attempts to give more objective indication as

to amounts of lack of marketability discounts.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 31

 Amount of Discount:

 Discount is significantly less in scope (e.g., 10%

versus 35%). For this reason appraisers are beginning to use the term illiquidity discount.

 Common Mistake:

 Many valuation reports apply significant lack of

marketability discount to controlling interest based upon these studies – which is not proper.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 32

 See Article Schweihs:

 http://www.willamette.com/insights_journal/10/wi

nter_2010_5.pdf

 Why consider collectively / Combined

discount.

 Good quote: “discounts have no meaning

until the base of value to which they are applied has been clearly defined.”

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 33

 Over half the value of a business can be “lost” in

the discounting process.

 Be aware of when discounts should be applied

and when they are not appropriate.

 Do not assume the valuator has detailed

knowledge of the strengths and weaknesses of discount studies or has properly used them.

 If you can’t understand how or why a discount

was applied in your client’s valuation report, then neither will the judge.

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 34

 The Bible:

 Pratt: Valuing a Business 5th Edition, 2008, Part IV

 BVR’s Guide to Discounts for Lack of

Marketability, 2013, 5th Edition.

 Business Valuation: Discounts and

Premiums: 2nd ed. 2009. See: Sample chapter.

 Chapter 7: Valuations Discounts and

Premiums: Fundamentals, Techniques and Theory, 2012

Gunnar J. Gitlin, Gitlin Law Firm, Woodstock, IL www.GitlinLawFirm.com 35

Divorce and the Impact of Valuations May 12, 2015

Personal Goodwill

Martin S. Varon

Investigative Accounting Group marty@iagforensics.com

36

Two Types of Goodwill

• Personal Goodwill
• Enterprise Goodwill

37

Personal Goodwill

Defined by Yoon v. Yoon, 711 N.E. 2d 1265 (Ind. 1999) – “Personal goodwill also referred to as professional goodwill is associated with the individual practitioner. This type of goodwill is based on revenues being generated because of the practitioner’s skills, knowledge, and

• reputation. …it is the value of earnings or cash

flow directly attributable to the individual’s characteristics or attributes.”

38

Characteristics of Personal Goodwill

• Ability, Skills and Judgment
• Strong Efficient Work Habits
• Age (younger) and Health (excellent)
• Personal Staff’s Relationship to Earnings
• Personal Reputation
• Marketing Focus on Individual
• In-bound Personal Referrals-source of New

Clients/Customers

39

Characteristics of Personal Goodwill (Cont’d)

• Closeness of Contact (can be physical and/or

emotional)

• Important Personal Nature of Service or Product
• Earning Power of Professional
• Duration of Professional Practice/Business
• Location of Practice/Business
• Size of Practice/Business

40

Enterprise Goodwill

• Yoon Case Quote

– “Goodwill in a professional practice may be attributable to the business enterprise itself by virtue of existing arrangements with suppliers, customers or others, and its anticipated future customer base due to factors attributable to the business.”

41

Enterprise Goodwill

– Clients frequent the business because of:

• Product
• Location

– Convenience of – Multiple Locations

• Multiple Providers (e.g. if your dentist is not there, we

use another dentist)

• Business Reputation vs. Personal Reputation
• Repeating revenue stream

– Most states say that the “out-spouse” is entitled to an equitable distribution of enterprise goodwill

42

Where Is Personal Goodwill Issue Raised?

• Family Law Cases where one of the spouses
• wns a closely held business
• Significant Tax Court Cases

– See Martin’s Ice Cream Co. v Commissioner, 110 T.C. 189 (1998)

43

Two Types of Personal Goodwill

• “Pure” Personal Goodwill
• “Transferable” Personal Goodwill
• Also known as “Saleable” Personal

Goodwill

44

“Pure” Personal Goodwill

• This cannot be transferred to the entity or

anyone else

• Example:
• Only neurosurgeon within 300 mile radius who is

capable of performing this specific and complex procedure

45

Transferable Personal Goodwill

• Many general dental practices have significant

personal goodwill – “My dentist works long hours.” – “He/she is known as one of the, if not the top dentist in town.” – “He/she has his/her hands in my mouth (closeness of contact).” – “I refer all my family members and friends to him.”

46

Transferable Personal Goodwill (Cont’d)

• However, this type of personal goodwill is

transferable – At some point the dentist will want to retire

• Bring in a younger dentist who will, over

time, work on each patient more and more with each visit

• Market place shows dental practices sell all

the time

• Specialized knowledge and personal relationships

can be transferred through development and training

47

Saleable (Transferable) Personal Goodwill

• In re the Marriage of McReath v. McReath, 329
• Wis. 2d 155, 789 N.W. 2d 89 (2011 Wisconsin)

– Goodwill that is saleable or which can be transferred/transitioned over time and training should be subject to an equitable distribution

48

• Enterprise Goodwill is marital and subject to

equitable distribution

• Personal Goodwill is not subject to equitable

distribution

• What does your state say about

transferrable/saleable (personal) goodwill that may be transitioned to a new owner ?

The Predominant Opinion in Most States

49

Non-Compete Agreements

• The presence of an agreement not to compete

apparently transfers all personal goodwill to the entity

• See Howard and Howard v. United States of

America, No. CV-08-365-RMP, (US District Court, Eastern District of Washington) – The IRS prevailed when court held that a dentist transferred all personal goodwill to the corporation when he signed a non-compete agreement.

50

Differentiating Personal from Enterprise Goodwill

• A $1,000,000 bank account that pays 5% interest

generates $50,000 of interest income

• Isn’t this the same as stating that an account

generating $50,000 of interest with a 5% interest rate is worth $1,000,000?

• Because $50,000 divided by 5% is $1,000,000

51

Differentiation (Continued)

• This is the basis of the income approach
• Numerator = ongoing average after-tax cash

flows to be received in the future

• Denominator = interest rate (capitalization rate)
• Increasing the numerator (cash flows),

INCREASES the value

• Increasing the denominator (cap rate)

DECREASES the value

52

FOUR METHODS DISCUSSED IN CASES OR INDUSTRY 1) Miller v. Miller, 288 Ga. 274 (2010)

• Increase the specific risk component in the

capitalization rate (i.e. INCREASE THE DENOMINATOR which decreases the value) 2) Estate of Adell v. Commissioner of Internal Revenue, T.C. Memo. 2014-155

• Adjust operating expenses to include an

economic charge for owner’s personal goodwill (Decrease the NUMERATOR which decreases the value)

53

FOUR METHODS DISCUSSED IN CASES OR INDUSTRY 3) WITH AND WITHOUT CALCULATION

• Prepare two valuations, one based upon

actual financial statements and tax returns as is

• Prepare second valuation, with subjective

assumptions of how company would look if

• wner was not present

54

FOUR METHODS DISCUSSED IN CASES OR INDUSTRY 4) In Re Marriage of Alexander, Appellate Court of Illinois (5th District) No. 5-05-019, September 2006

• Multi-attribute Utility Model (MUM)
• Model acknowledged or upheld in at least three

states (Illinois above)

• Ohio – Banchefsky v. Banchefsky, 2010 Ohio 4267
• Oklahoma – Lieberman v. Lieberman, No. FD-2008-

956

55

Disadvantages/Challenges to Each Method

1. Increasing the capitalization rate is very subjective

• “How was adjustment to cap rate calculated?”

2. Decreasing the numerator/net cash flows with an “economic charge” is also very subjective

• “How was amount derived?”

3. With and Without Calculation

• Numerous subjective assumptions made to arrive

at this analysis

56

Disadvantages/Challenges to Each Method

4) Disadvantages of MUM: – Although MUM provides a forum to discuss applicable personal and enterprise goodwill attributes:

• Attorneys question if financial expert is an

expert with respect to subjective fact finding

• Attorney will walk you through changes in

each utility (importance and existence) and inquire as to impact of calculation of value

57

Practice Pointer

• Be wary of owner who claims:

– “I AM THE BUSINESS!” – “Without ME, there is no business!” – However, enterprise goodwill or transferable personal goodwill could be more applicable

58

Questions

IAG Forensics & Valuation Marty Varon (770) 565-3098 (office) Marty@IAGForensics.com 59

“Double Dipping”

Anne Marie Jackson, Esquire Ain & Bank, P .C. Washington, DC

www.AinBankLaw.com 60

What is “Double Dipping”?

“Double Dipping” is the concept that the same income stream is being counted twice.

• Once as an asset for the division of property
• And again for the determination of spousal support

61

Retirement Assets are the Clearest Example

• Retirement assets are divided at divorce as part of the

property settlement.

• At retirement, the alimony payor converts the retirement

asset into a stream of income.

• The alimony receiver seeks to have the retirement income

stream considered as part of the income available for alimony.

• The asset is the income stream that will be produced.
• A clear “double dip”

62

“Double Dipping” applied to a business

• “The theory is that when a business is valued using a

capitalization of earnings approach, it is double dipping to both distribute the business and then base spousal support on the income the business produces.” Morgan, “Double Dipping”: A Good Theory Gone Bad, 25 J. Am.

• Acad. Matrim. Law. 133, 142 (2012)

63

Various Methods to Determine Value of a Business

• (1) The income approach
• (2) The market approach
• (3) The asset approach
• The issue of “Double Dipping” comes up when the income

approach is used.

64

Arguments in Favor of “Double Dipping” Related to a Business

• The role of past earnings is to provide an indication of

projected future earnings.

• If a business owner receives net cash flow in excess of what a

similarly situated non-owner would receive, when using these excess earnings to quantify the value of the business, and then also fixing spousal support based on the business

• wner’s total income, the potential for “double-dipping”
• ccurs.
• Leading case is Grunfeld v. Grunfeld, 94 N.Y.2d 696 (2000)

65

Grunfeld

We agree with the defendant that the Supreme Court [the trial court in New York State] impermissibly engaged in the “double-counting” of income in valuing [the husband’s] business, which was equitably distributed as marital property, and in awarding maintenance to the [wife]…Here, the valuation of the [husband’s] business involved calculating the [husband’s] projected future excess earnings. Thus, in valuing and distributing the value of the [husband’s] business, the Supreme Court converted a certain amount of the [husband’s] projected future income stream into an asset. However, the Supreme Court also calculated the amount of maintenance to which the [wife] was entitled based on the [husband’s] total income, which must have included the excess earnings produced by his business. This was

• improper. ‘Once a court converts a specific stream of income to an

asset, that income may no longer be calculated in the maintenance formula and payout.’

66

An Example

As Reported As Revised Sales $1,500,000 $1,500,000 Less: Cost of Goods $1,000,000 $1,000,000 Gross Profit $ 500,000 $ 500,000 Less: Operating Expenses $ 100,000 $ 100,000 Less: Salary for Owner’s Job $ 400,000 $ 50,000 Net Income/Net Cash Flow $ 0 $ 350,000

67

“Double Dip”

• Using the net cash flow of $350,000, there is a determination
• f value -- $1,400,000 – which is to be divided between the

parties as a division of property.

• Using the corrected salary for the employee her of $50,000 per

year.

• But in determining support, the Court uses the full $400,000

per year.

68

Not everyone agrees…

69

Arguments Against “Double Dipping” Related to a Business

• Regardless of the valuation method used, the goal is the

determination of fair market value.

• Use of earnings is simply one tool in determining the current fair

market value

• From the earlier example, if the business is valued at

$1,400,000 and the non –business owner is awarded ½ or $700,000 and the business owner keeps his “excess earnings”

• f $350,000, within two years, the business owner has

recouped what was paid to the non-business owner spouse and will continue to receive the excess earnings going forward.

70

Problem: Business Is Illiquid / Unmarketable

• Solution #1:

If available, off-set with other assets of comparable value.

• Solution # 2:

If unmarketable because of personal goodwill that would vanish upon sale to third party, use that personal goodwill as basis for substantial spousal support.

• Solution #3:

“Business alimony” à la Georgia’s Miller v. Miller decision, 288

• Ga. 274, 274 (2010) (noting that trial court ordered 24 monthly

payments of $3,450.14 each to award wife her equitable share of the value of husband’s business over time).

71

Problem: Excess Compensation

• Two Alternatives that Avoid the Dreaded “Double

Dip”: 1) Use excess compensation in business value and then use reasonable compensation for support; OR 2) Use reasonable compensation in business value and use excess compensation for support.

72

The Business Owner and Non-Business Owner Choose Differently Here

• The business owner spouse wants the business valuation to

be based upon reasonable compensation and spousal support to derive from excess earnings. Why?

• Modifiable
• Tax deductible
• BUT: non-dischargeable in bankruptcy
• The non-owner spouse wants the business valuation to be

based upon excess compensation and spousal support to derive from reasonable compensation. Why?

• Non-modifiable
• Non-taxable
• BUT: dischargeable

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Problem: No Easy Fix

Solution: Argue Steneken “fairness” in whatever manner serves your client’s case-specific interests, given the nature of the marriage, the available assets, and the factors impacting the value of (and or liquidity of) the business. “We start from the bedrock proposition that all alimony awards and equitable distribution determinations must— both jointly and severally—satisfy basic concepts of fairness.”

Steneken v. Steneken, 183 N.J. 290, 298-99, 873 A.2d 501, 505-06 (2005).

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