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

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
[e-mail]
858-255-1321
San Diego Divorce Mediation & Family Law
www.SanDiegoFamilyLawyer.net

Episode Transcript

Speaker 1 (00:02):
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 andwe're excited to talk to you
about some of the differentaspects of business and income
available in the divorceproceedings.

Speaker 2 (00:22):
Yeah, thanks so much for joining Sarah.
This is exciting.
I think we'll give some goodinformation.
I'm Scott Levin.
I'm a family law attorney and aCDFA, but I help people
primarily as a mediation lawyerin California and a lot of my
cases right now involve businessownership and there's kind of

(00:43):
twofold, like there's the sideof the business dealing with the
business and a divorce as anasset.
So one spouse is going to endup 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 yourworld.
Another sub issue which isreally like a very, very, very

(01:06):
important and I think, often notreally understood by our
clients or, more specifically,other professionals, is you know
how does business income impact?
You know the child and spousalsupport, you know calculations
and calculus to arrive at thosefigures, and I guess I just
wanted to throw out that topicand see what you know.

(01:29):
Kind of take us down that roadand I'm sure I'll have questions
, but that's a really, reallyimportant issue.

Speaker 1 (01:34):
Yeah, it definitely is, and you know everything is a
little bit different in eachstate, each type of business.
But in general there are twocomponents to the business
valuation that impact the assetthat can be divided in the
divorce and then also the incomethat can be considered for

(01:56):
spousal or child support.
So when you do a businessvaluation 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 lookat what the owner replacement
salary is.
And so as some people ownsmaller businesses not everyone

(02:20):
maybe takes a salary.
They take the distributions.
So we use data to give us theyou know, accurate for the
geographic area, the type ofwork they're doing, how many
hours per week they're working,and we pull that out of our
calculation when we go to do thebusiness valuation.
So what that means is that'skind of a separate component, so

(02:41):
that salary could be consideredfor income for child support or
spousal support.
And then when you do thebusiness valuation, you can use
historicals, you can use a lotof different methods, but really
what you're looking at is thepresent value of the future cash
flows of the business.
So that's based on you knowkind of the net income, the

(03:03):
distributions depending on thebusiness type, and what's really
important is that is includedin the asset calculation.
So many practitioners likemyself believe that it would be
double dipping to count thatmoney also in the income
available for support for childor spousal support, and so all
of our calculations we have thatsalary we pull out also in the
income available for support forchild or spousal support, and

(03:25):
so all of our calculations wehave that salary we pull out.
That's what we really believe.
You know they could be earningas a salary.
We can talk about that forsupport.
But when it comes to if you'redividing the business and you're
taking a cash payout, thatdistribution income I don't
believe should then be recountedin the support calculations as

(03:47):
well.

Speaker 2 (03:48):
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 andhow much, you know, the
non-owning spouse will receive?
What if the business pays?
What if the distributions, uh,from the business immediately

(04:10):
pay that person that amount?
Is that touching on any likecommunity versus separate
property?
Like the payments are comingfrom the actual business, but
were they accounted for?
Does that make sense?

Speaker 1 (04:23):
Yeah, I think it makes sense and that is
accounted for in the calculation.
You know, one of the thingsthat's challenging in the
business valuation space isyou're not necessarily talking
about physical cash all the time.
You're talking about what thebusiness earned, but maybe that
was spent somewhere else at somepoint in time and it's not
physically sitting in the bankaccount as we're doing the

(04:45):
valuation, but it still can bepaid, you know, from those
distributions they can pay itfrom their salary.
You know, wherever the physicalmoney comes from is different
than you know the calculation ofthe theoretical division, so to
speak.

Speaker 2 (05:01):
And so the the replacement value that you're
really focused on primarily inassigning the income to the
business owner, is that usuallyaccounted for as just like gross
W-2?

Speaker 1 (05:15):
So it really depends when we look at the business
valuation.
So take an S-corp, for example.
An S-corp usually has soleownership.
The reason that they'restructured that way is simply
for tax purposes and, let's behonest, not everyone takes the
required salary that they'resupposed to pull out.
So part of what we do is wenormalize that number to what we

(05:39):
would expect.
So if you're a sole businessowner, 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 todo that?
To fully put together thepicture of what your
compensation package should beversus what you're actually

(06:00):
taking yeah, interesting.

Speaker 2 (06:02):
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 heldby an older person, a younger.
You know, hustler acquires thebusiness while married with to
his wife and the business overthe last 18 months or so really,

(06:26):
really ramping up because ofthe, presumably because of the
more you know, the new energy,uh.
But lawyers involved in thiscase want to use a historical
perspective of it, of of what'sbeen happening over the last
five years, to get kind of anaverage.
Uh, would an event like thatlike 18, 24 months ago and then

(06:48):
a spike in success?
Would that be a reason not togo beyond those two years?

Speaker 1 (06:54):
So we do it a couple of different ways.
Whether we're doing anindication of value or a
conclusion of value, we look atboth the income and the market
approach.
So when you're looking at theincome approach, you are doing
that capitalization of earningstreams.
What we tend to do is weight doa weighted approach where we
weight the most recent yearshigher.

(07:14):
So, for example, if it's fiveyears of income, we would do the
most recent year times five,the year before, times four and
kind of.
You know that helps to balanceout some of the historical
irregularities that could occur.
The other is we also use themarket approach where we can use
an industry rule of thumb, suchas an EBITDA multiple.

(07:36):
We also look at privatetransaction data and by doing
all of this we try to make sureour numbers are in line with
industry averages.
Of this, we try to make sureour numbers are in line with
industry averages.
So if we do your incomeapproach and it comes back at
like $100,000, but the industryis telling us $400,000, we know
there's something off and wehave to see okay, are you taking

(07:57):
more expenses than you shouldbe?
Is there some historical eventlike you referenced that's
impacting this?
And that's kind of a way for usto sanity check to also make
sure we're on the right path.

Speaker 2 (08:10):
What do you find is the biggest struggle for parties
themselves that are goingthrough a divorce in regards to
you know that involve a businessand business ownership and
business buyout.

Speaker 1 (08:25):
Yeah, I think it's a couple of things.
So I'm in New York, which is anequitable distribution state,
and so I think it's reallychallenging to decide what that
equitable percentage is.
You know someone, especiallythese small family businesses
that spouse has maybe held itfor 20 years, really worked in
on it, and it's hard for them toagree on a percentage that they

(08:48):
would divide this business byand the other and I just had it
happen last week is thereference I made to the double
dipping of using thedistributions for alimony and
child support and also for thebusiness valuation.
It's really hard and you knowdifferent experts will say
different things, but in moststates it is considered double

(09:09):
dipping and that's sometimes ahard pill to swallow.

Speaker 2 (09:13):
So if a business, so if a business owner is hesitant
to kind of bring on thevaluation company and your
services because they fear thefees, really they could be
harming their own outcome by nothaving a true professional make
the analysis.
Yeah, and in mediation they'regoing to kind of have to come up

(09:38):
with whatever they can agree onwithout knowing what they don't
know, and the mediator willjust sit there saying why don't
we bring in somebody?
Why don't we bring in somebody?
I'd feel better if we broughtsomeone in.
But you know that fear of feesthough.
I mean, if you double dipyou're talking about hundreds of

(09:59):
thousands of dollars.
Presumably that would go outthe window.

Speaker 1 (10:05):
Yeah, and I think that that is really important
and that's one of the thingsthat we try to really work on at
our firm is, especially in themediation space, what is an
affordable amount that makes thebusiness valuation worth it.
So we offer kind of lighterapproaches, which is either an
agreed upon procedures or anindication of value.

(10:25):
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 isthis correct number, what are
all the levers we used.
Because really, when you gointo these conversations, you
want to have as much knowledgeand information as possible and

(10:45):
you don't want to have that likewhat if I left something on the
table?
Kind of nagging at you.

Speaker 2 (10:51):
Absolutely, absolutely.
It's a big, big issue inmediations where there's a
downward pressure on, you know,costs and affordability,
weighing that against.
Of course, you know, knowinglike let's get certainty, like
let's just figure this out.
So we're not going to guess andI don't want to hear from

(11:12):
anyone four years from now aboutX, 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, unlessit'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 questionsand little issues that come up.

(11:33):
Right now I have a caseinvolving a personal injury firm
and there's question is likethere's so many ways to address
that, those cases that will bepaid out in the future but that
were acquired while they weremarried, and how to account for
the legitimate expenses incurredand maybe what's not.
I mean, there's so many uniqueissues that come up and I'm just

(11:56):
thankful to know you and beable to rely on you.

Speaker 1 (11:59):
Thank you and, truthfully, we're always happy
to have a consultation,especially in mediation.
We love to be engaged as aneutral by both parties so that
you're not both paying for yourexperts.
We have one person we agree on.
We always do our workindependently and objectively
and just try to add thatinformation and peace of mind to

(12:19):
the sessions.

Speaker 2 (12:21):
Yeah, thank you so much.
You do wonderful work and it'sa real benefit to people going
through divorce, whether you'remediating or choosing the
alternative.

Speaker 1 (12:30):
Yeah, of course.
Thanks so much for having me.
It's great talking with you.

Speaker 2 (12:33):
Thank you guys.