Marriage dissolution is never easy. Throw in the complexity of one spouse owning a business that must be equitably valued and the complications multiply. Fortunately, forensic accounting experts who also have served as marital dissolution accountants and business valuation experts can help unravel the complexities and help the parties reach a fair valuation of the business.
“The issues a forensic accountant will consider in these matters are not issues that people normally think about nor are they issues that are generally understood,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley. “A forensic accountant must start by taking the spouses and their attorneys through an educational process so that they will understand how a forensic accounting expert addresses valuation issues in a divorce.”
There are four key business valuation issues that frequently arise in marital dissolutions, explained Anderson, a Certified Valuation Analyst who also has served as a marital dissolution accountant in Philadelphia and the Delaware Valley. They are:
- The cost of the in-spouse’s services to the business being valued (the in-spouse is the spouse who owns the business interest being valued as opposed to the out-spouse who does not have ownership in the business);
- Personal goodwill and its impact on the business being valued;
- The presence and impact of unreported cash sales;
- Personal expenses charged to the business.
This article, the second of a four-part series, will explore the second of these issues — personal goodwill and its impact on the business being valued.
Personal goodwill is the portion of a business’s value and income that is attributable to the personal reputation, expertise or contacts of one or more of the business’s owners, according to Anderson, a divorce accountant and business valuation expert whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes marital dissolution and business valuation services in Philadelphia. This issue comes into play mostly in professional services businesses, such as physicians, attorneys, accountants, engineers, etc.
A divorce accountant must disregard personal goodwill when valuing a business because it is assumed the in-spouse’s reputation, expertise or contacts would not accompany the business if it was sold.
Anderson, a Certified Valuation Analyst who is a business valuation expert and marital dissolution accountant in Philadelphia, recalled a case in which he was asked to value an anesthesiology practice whose senior member (the in-spouse) had a stellar reputation on the east coast.
During his investigation, Anderson discovered that the practice regularly received referrals from other doctors because of the in-spouse’s widespread, excellent reputation. Further Anderson found that the business that came from the referrals represented a significant percentage of the practice’s revenues. As a result, Anderson a forensic accounting expert in Philadelphia and the Delaware Valley, reduced the value of the practice to reflect that the personal goodwill of this senior member was responsible for a large percentage of revenues.
“The out-spouse clearly expected that a higher value would be placed on the business,” said Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley. “But so much of the practice’s business came from the anesthesiologists highly regarded reputation. If the in-spouse left the practice or it was sold, the business would have dropped off precipitously, meaning the true value or the business was far less than it seemed.”
The next posting in this four-part series exploring valuation issues a forensic accountant must consider in divorce cases is an examination of the presence and impact of unreported cash sales.
If you are in need of a marital dissolution accountant in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst. Anderson also has served as a divorce accountant or marital dissolution accountant in Philadelphia and the Delaware Valley.
