Business Valuation Issues In Divorce To Look Out For

Divorce is complicated no matter what. It can be a highly emotional, legally complex, and bureaucratic process. The process can become even more difficult for those who have a personal business or closely-held company to their name.

Risks Involved

Community property valuation during divorce can lead individual spouses to either perform illegal actions or be suspicious of one another. Sometimes, in an attempt to protect their finances, a spouse will either hide information, transfer assets or misreport financial information. This is, of course, fraud. 

Unless there happens to be a substantial prenuptial agreement or business shareholder agreement, the legal proceedings of divorce will likely be complex. Much of this process will involve business valuation, determining the economic value of a company’s assets.

What is a Forensic Accountant?

Business valuation in a divorce may involve many professionals,  including attorneys, business valuation specialists, and often a forensic accountant. Although we generally associate forensics with things like blood spatter and fingerprinting, forensics is simply the application of scientific analysis into the investigation of crime.

Forensic accountants are professionals who perform in-depth investigations of financial histories and present evidence about them in a court of law. Not every divorce with community property will require the assistance of a forensic accountant. But if there are doubts, disagreements, or suspicions, one may be necessary to settle legal disputes. 

Actions Performed by a Forensic Accountant

Depending on the complexity of the business situation, and the cooperation of all parties involved, a forensic accountant may be tasked to perform all of the following actions during a divorce settlement:

• Value the business
• Determine income
• Trace assets
• Analyze marital spending habits and create a balance sheet
• Analyze tax information, including benefits
• Prepare for and testify during the trial

In general, forensic accountants’ duties fit loosely into categories. These include researching the married couple’s community property, investigating their individual tax histories, and formally presenting the evidence. In most cases, the process does not escalate to a trial setting, but it becomes necessary in some complicated cases.

How To Mitigate Business Valuation Issues

When community property is involved in a legal union like a marriage, complications are more likely. There are both preventative and retroactive ways to counter the energy and time into a divorce. Prenuptial agreements are the earliest, most preventative ways to protect both parties and later simplify the business valuation process. While not possible for business creation, shareholder agreements are a smart option when marriage and business overlap. 

If neither of these agreements was put into place, the best course of action is to hire a forensic accountant early and ensure both parties cooperate as much as possible. Divorce is stressful and costly: why make business valuation a bigger burden than it has to be?

Need help getting there? Reach out to us at Miod & Company today!