In this YouTube interview, forensic accountant Sarah Nanchanot of SN Forensics and family law attorney/mediator Scott Levin discuss how business ownership and valuation intersect with divorce proceedings in California. They explain that a business valuation has two key components: the net income (including owner replacement salary) that influences child and spousal support, and the present value of future cash flows that determines the business’s asset value for division. They stress that counting the same money both as a distribution for asset division and as income for support—"double dipping"—is generally improper. The conversation covers valuation techniques such as the income approach (capitalizing earnings, weighting recent years more heavily), the market approach (industry rule‑of‑thumb EBITDA multiples, private transaction data), and how to normalize owner salaries, especially for S‑corps. They address practical challenges like recent rapid growth of a business, equitable‑distribution calculations in states like New York, and the difficulty parties have agreeing on a fair percentage. The experts also discuss cost concerns, offering lighter‑weight valuation options (indication of value, agreed‑upon procedures) that become cost‑effective once the business exceeds roughly $10,000 in value. Finally, they highlight the role of a neutral valuation expert in mediation, emphasizing affordability, clarity, and avoiding costly guesswork for both parties.
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Hi, everyone. I'm Sarah Nanchanot. 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.
Yeah, thanks so much for joining, Sarah. This is exciting. I think we'll give some good information. I'm Scott Levin. 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 in a divorce as an asset. So if one spouse is going to end up with the business, they have to buy the other out. What is the value? What are the numbers? How do we deliver it? So that's a whole, I know that's your world. Another sub-issue, which is really like 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 kind of take us down that road. And I'm sure I'll have questions, but that's a really important issue.
Yeah, it definitely is. And everything is a little bit different in each state, each type of business. But in general, there are 2 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 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 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. 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. 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.
What about if 2 parties arrive at a settlement for the division of a business, so they reach an 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 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?
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.
And so 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?
So it really depends when we look at the business valuation. So take an S corp, for example. An S corp usually, you know, 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 gonna 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. 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 hustler acquires the business while married to his wife, and the business over the last 18 months or so really, really ramping up because of the— presumably because of the new energy. But lawyers involved in this case want to use a historical perspective of it, of, of what's been happening over the last 5 years to get kind of an average. Would an event like that, like 18 to 24 months ago, and then a spike in success, would that be a reason not to go beyond those 2 years?
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.
Mm-hmm.
So for example, if it's 5 years of income, we would do the most recent year times 5, the year before times 4, and kind of, you know, that helps to balance out some of the historical irregularities that could occur. 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.
Mm-hmm.
And by doing all 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's 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.
What do you find is the biggest struggle for the parties themselves that are going through a divorce in regards to, you know, that involve a business and business ownership and business buyout?
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.
Mm-hmm.
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.
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 Yeah. And they're either going 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, if you If you double dip, you're talking about hundreds of thousands of dollars, presumably, that would go out the window. 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 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 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?
Absolutely. Absolutely. It's a big issue in mediations where there's 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 4 years from now about X, Y, or Z either, you know.
Right.
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, uh, 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, uh, those cases that will be paid out in the future but that were acquired while they were married, and, and, 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, um, and I'm just thankful to know you and be able to rely on you.
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.
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, or, you know, choosing the alternative.
Yeah, of course. Thanks so much for having me. It's great talking with you.
