Ending a marriage equitably can be a complex process when spouses and their attorneys face the daunting prospect of determining the value of a business. In these cases, it is always a good idea to consult a forensic accounting expert who also has served as a marital dissolution accountant and a business valuation expert to help the parties reach a fair valuation of the business.
“Rarely do the parties fully understand the issues that must be considered by a forensic accountant in these matters,” 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. “The process often begins as an educational one in which a forensic accountant must explain to the spouses and their attorneys how a forensic accounting expert addresses valuation issues in a divorce.”
Anderson, a Certified Valuation Analyst who has served as a marital dissolution accountant in Philadelphia and the Delaware Valley, said there are four key business valuation issues that arise repeatedly in marital dissolutions. 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 first of a four-part series, will explore the first of these issues — the cost of the in-spouse’s services to the business being valued.
Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, said he was once asked to value a one-person ophthalmology practice in which the in-spouse earned about $200,000 a year. The out-spouse and his attorney believed the business would be valued at more than $1 million, but Anderson assigned a value of less than $150,000.
“The out-spouse and his attorney did not consider the cost of the in-spouse’s services to the practice,” said 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. “If a hypothetical buyer of the practice was not an ophthalmologist, the buyer would have to hire an ophthalmologist at a cost of $180,000 a year for a person with the same level of education and experience as the in-spouse. Hence, the annual net income of the business available to the buyer would be only about $20,000, not $200,000.
“If another ophthalmologist purchased the practice, that person would know he or she could earn $180,000 working for another practice without having to invest money in a practice. Why would anyone spend more than $1 million to earn only an extra $20,000 per year? They wouldn’t,” said Anderson, a business valuation expert and marital dissolution accountant in Philadelphia. “The practice simply was not worth as much as the out-spouse thought.”
Of course, a valuation can go either way. Anderson, who also is a Certified Valuation Analyst, was once asked to value a retail furniture business whose CEO (the in-spouse) had an annual salary of more than $1 million and whose business had annual net income of less than $50,000. The in-spouse expected the business to be valued at about $300,000 and was shocked when Anderson valued it at approximately $3 million.
“At the time, a hypothetical buyer could hire a CEO for about $350,000 per year, not the $1 million plus salary the in-spouse was taking,” said Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley. “The $650,000 per year salary differential had to be added to the business’s bottom line, thereby resulting in a higher-than expected valuation. These are the types of issues a divorce accountant has to consider to determine the fair value.”
Up next in this four-part series exploring valuation issues a forensic accountant must consider in divorce cases is an examination of personal goodwill and its impact on the business being valued.
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 firstname.lastname@example.org.
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.