In matrimonial litigation involving both the value of a business and spousal support, the compensation (salary, benefits, etc.) paid to the propertied spouse should, in theory and in fairness, be the same for both determinations. If they differ, one party ends up benefiting twice (“double-dipping”) at the expense of the other.
If the business valuation assumes compensation of $100,000 and the support calculation assumes $150,000, the non-propertied spouse benefits from a high business value (due to lower compensation expense) and high support: thus the double dip. Reverse those numbers and the propertied spouse (business interest owner) double dips at the expense of the non-propertied spouse.
The same situation arises with ESOPs. Here, compensation paid to the seller (of shares to the ESOP) after the sale should be the same as that assumed in the valuation. If the valuation assumes $100,000 compensation and the actual is $150,000, the seller double dips from a higher business value and higher subsequent compensation.
It also arises with affiliated entities – those under common ownership. If an individual owns (interests in) a business and a separate entity that owns real estate leased to the business, the values of the respective entities should be based on the same rents. The same applies to management companies that charge fees to operating businesses. Inconsistent valuation assumptions about payments from one entity to another result in double-dips. (In this case, it might be a reverse double dip. If the business is valued with rent expense of $150,000 and the real estate is valued with rent income of $100,000, the values of both entities are too low. Clients might like that for estate and gift tax purposes, but it is wrong.)
So, we see that double-dipping mischief can arise in these three cases. What can we do about it?
In matrimonial litigation (in my relatively limited experience), the appraiser is not responsible for spousal support. The parties negotiate it or the trier of fact establishes it. I point out the double-dipping issue in my report and testimony. I lead the horses to the water: that is all that is within my power.
In ESOPs, the same applies. I point out the issue in my report, and recommend that the ESOP sale also include employment contracts for sellers with appropriate compensation in order to avoid an obvious Department of Labor challenge. I lead the horses to the water and put their mouths in it; that is all that is within my power.
In affiliated entity valuations, I point out the issue in my report and value both entities using identical rent (fee) assumptions. If there are simultaneous transactions involving both entities (and my valuations are used), the horses are led to the water, orally immersed, and drink it. If, however, only one entity’s interest(s) are transacted, or the second entity’s transaction(s) occur(s) later, it’s like an ESOP: the horses’ mouths are wet, but I cannot make them drink.
It all comes down to this: make sure that your valuations are consistent and that double-dipping issues are explicitly identified and explained, with appropriate recommendations for action. Lead the horses to the water, put their mouths in it, and try to make them drink it. If they choose not to, they have been warned carefully, and it’s on them, not you, to deal with the consequences of non-compliant inequities.