What a Forensic Accountant Looks For When a Spouse Says "The Business Isn't Worth Much"
That claim is sometimes true. Businesses do decline, and owners do carry heavy debt. A forensic accountant does not assume it is false. The work is to test it against evidence that does not depend on the owner's word.
The insight: taxable income is a tax number
A business can show a small taxable profit while generating substantial cash. Accelerated depreciation, owner perks, prepaid expenses, and discretionary spending all reduce taxable income without reducing the cash available to the owner. The first test is always cash flow, not net income.
Seven tests
Reported profit against economic profit. Restate earnings for owner pay, perks, personal expenses paid by the company, depreciation that exceeds real wear, and one-time items.
Cash flow against taxable income. Start from reported income, add back non-cash charges, and adjust for changes in working capital and debt payments. Compare the result to what the owner actually drew.
Timing. Compare monthly revenue, margins, and payables to prior years and to the seasonal pattern. A decline that begins near the separation or filing date deserves attention. Look for delayed invoicing, accelerated expenses, prepaid vendors, deferred collections, and stretched payables.
Related-party dealings. Rent paid to the owner's real estate entity, management fees, loans to and from the owner, payroll for relatives, purchases from related companies, and new entities that serve the same customers.
The balance sheet. Check whether shareholder loans are real debt, whether fully depreciated equipment is still productive, whether receivables or work in process are unrecorded, and whether cash or inventory sits in another entity.
Statements made when no one was thinking about divorce. Loan applications, personal financial statements, insurance applications, offers to buy the business, and marketing claims. Those show what the owner said the business was worth when the incentive ran the other way.
Lifestyle against reported income. A family that spends well beyond reported earnings is being funded by something (article 3).
What a good analysis also does
It can confirm the claim. If cash flow is weak, related-party dealings are at market, and lender documents tell the same story, the report says so. An analysis that finds nothing wrong credibly is worth more to a client than one that always finds something.
Questions to ask your expert
How does cash flow compare with reported net income for each year?
How do monthly results compare with prior years, particularly around the separation date?
Which related-party transactions exist, and are they at market terms?
What did the owner tell lenders, insurers, or prospective buyers?
Which conclusions rest on the owner's statements and which rest on documents?
Comments