Ohio divorce court includes AR in asset-based valuation

BVWireIssue #158-2
November 11, 2015

Is a business that bills its customers worth more than one that’s cash and carry? Yes, says an Ohio divorce court—and the appellate court agrees. This is another case in the ongoing saga of the double dip. The issue in this case is whether to include accounts receivable in the value of a business when using the asset approach.

Painful extraction: The parties fought over the valuation of the husband’s dental business. The wife’s expert used the company’s balance sheets and made several adjustments to reach a valuation of nearly $313,300. One of the adjustments was adding over $200,000 in accounts receivable to the business value. To determine income for spousal support purposes, he averaged earnings from the business for three years as a starting point and reduced that figure by the child and spousal support paid. He calculated a pretax monthly spousal support amount of nearly $6,300.

On cross-examination, he was asked about the accounts receivable. He explained that, in terms of taxes, “When those receivables are collected in the subsequent period or in the following year, they would be recognized as taxable income as the collection of those receivables in that subsequent year.” He added, “There’s going to be approximately 200-some thousand dollars of accounts receivable in existence, and those are going to, as a rolling advantage, continue being collected and recognized as cash-basis income.” When asked about the 2008 Heller case ruling on double dipping, he said double-dipping “has no bearing on an instance where the company is valued based on an asset approach.” This was the case here.

The trial court adopted his business valuation as the “most conservative and directly relevant—and therefore the most equitable”—determination. Based on the three-year average earnings the wife’s expert calculated, the court also ordered monthly spousal support payments of nearly $6,300 for an indefinite period.

Present stream of income: On appeal, the husband claimed that the wife’s expert dipped into the very accounts receivable he used to value the business when he calculated earnings for spousal support. The accounts receivable were akin to “future business profits” or a “future stream of income,” as contemplated in Heller and Gallo. Therefore, an asset-based valuation does not preclude the occurrence of a double dip, the husband contended. He cited a Wisconsin case that prohibited any account receivable from being classified as a martial asset and as income includable in the spousal support calculation as support.

The appeals court dismissed the significance of the Wisconsin case. Moreover, the accounts receivable were present assets of the company “in the sense discussed by Heller I or Gallo,” the Court of Appeals emphasized. Although Ohio law did not provide a ready definition of “future income streams,” case law suggested the phrase meant the “projected, ongoing value of an asset.” Courts have mentioned “pensions, business and professional goodwill, and dividend-yielding stock” as the types of assets that generate future income streams, the appeals court observed. Further, in the recent Sieber case, the trial court treated the accounts receivable that was included in the prevailing asset-based valuation as present, not future, income, the Court of Appeals added. The trial court’s valuation and spousal support findings were not error, the appeals court concluded.

Takeaway: Ohio divorce law does not consider accounts receivable as a future income stream for purposes of the double dipping analysis.

Find a discussion of Settele v. Settele, 2015 Ohio App. LEXIS 3629 (Sept. 15, 2015), in the December issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw. Digests and court opinions of the other cases mentioned above also are available at BVLaw (subscription required).

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