Family Law – Blame it on Rio
Family law, how can this be connected with the recent Olympics, I hear you say.
When I look back on how many family law matters that our firm has been involved in over the years, I’ve noticed that there often appears to be a common thread. Typically, one of the parties to the impending divorce (often the husband) proceeds to justify why a profitable and otherwise healthy business suddenly commences a downward and often “terminal” spiral towards a path of barely struggling to put food on the table.
It never ceases to amaze me, the reasons or justification for the “significant” but completely unexpected deterioration of the business.
We have heard a variety of excuses over the last couple of years including the Global Financial Crisis (“GFC”). Interestingly, the excuse has been used significantly after the GFC hit the rest of us.
Maybe we can expect to see a new wave of excuses, including the “RIO” effect or put more simply, that I was so engrossed in the Olympics that I didn’t see the financial deterioration occurring in my business.
As forensic accountants, in undertaking a valuation of a business for family law purposes, or any purpose for that matter, we have a professional responsibility to consider all the facts and circumstances surrounding the particular business. It is incumbent on us to ensure that our expert reports are relevant, appropriate in the circumstances and take into account ALL relevant factors to ensure meaningful advice is provided to all parties, including the Court.
Therefore, whilst, it would be remiss of us not to consider any legitimate financial impact on a business, equally, we also have a professional obligation to GFC, i.e. Get it Fundamentally Correct.
Typically, we find that one party to the relationship is the key business driver and it is this person who often seeks to “minimise” the value of the business in conjunction with their professional advisers, to the detriment of the other party to the proceedings.
Where are we seeing “adjustments” being made or closer scrutiny being required?
- Acquisition of items of plant and equipment that are subsequently expensed,
- Pre-payment of expenses, i.e. rent and other lease commitments,
- Deferment of sales that materially impact turnover,
- Loss of interest and drive in the business, (note, this maybe a genuine loss),
- Purposely running the business down, thereby causing the business value to be eroded,
- Manipulation of inventory items, i.e. running down stock levels or writing off stock that may not be obsolescent,
- Putting private expenses thru the business,
- Cash sales not being recorded,
- Non-commercial rates of salary, super and other benefits being provided,
- Allocation of expenses to the business that relate to other business operations for related entities within a family group,
- Significant and often unjustifiable increases in related party loan accounts to effect an erosion in the equity,
- Sale of the business for undervalue and/or to a non-arm’s length purchaser,
- Adoption of the tax depreciated written down value of plant and equipment, rather than looking at the “going concern” value.
I am also seeing situations where the value of the business (if the proprietor accepts that the business has a value), then the value is solely attributed to the Proprietor and without,the proprietor, no value can be attributed.
Whilst, this is an interesting theoretical argument, in the interests of assisting with any matrimonial proceedings, I consider that the Family Court will not adopt the same view in this regard.
To put this more succinctly, a business that has a history of operating profitably will (in the absence of any legitimate reason for a financial deterioration) most likely continue to have a value to be accounted for as part of the matrimonial pool.
I cannot emphasise enough the importance of seeking appropriate independent professional advice to assist you in assessing the valuation of a business for family law purposes or any other purpose for that matter. Please refer to the Family Court website here for further general guidance to assist parties dealing with family law matters.
Please refer to our services page for further information and do not hesitate to contact our office if you have any queries or if we can assist you further in regards to a business valuation for family law purposes.