Do Your Own Forensic Analysis of Your Business Before Your Spouse Does!
You own a business or at least a chunk of one. Things are not good at home and they are headed into a “separate” direction. Chances are your business was acquired during the marriage or increased in value during your marriage. So, it’s either marital property in its entirety or partially to the extent the business increased in value during the marriage.
Many business owners spend weeks, months, years in denial of this reality. “The business is nothing without me.” “My spouse didn’t do a damn thing for this business.” As lawyers, we hear it all. It’s all about the emotion and not about the law. The law is clear.
One of the things that frustrates lawyers is how little people know about the financial side of their business. When you interview divorce lawyers the topics discussed will include support and business value. Most of us ask prospective clients to bring some tax returns or financial statements for their business to the first meeting. Until a few years ago, the client would sheepishly produce business returns kept in a musty file cabinet. Nowadays, we get a data dump from the client’s accountant and often the client is as unfamiliar with the electronic file as the lawyer.
That can be a problem. We live in an age when income is received, expenses are paid, and the records are all kept electronically. Most businesses have a system like QuickBooks and the person keeping those books routinely “dumps” the data into the hands of the friendly accountant. The days of shoeboxes, register tapes and handwritten bank deposits seem to be ancient history.
In one sense this is good. At least it’s efficient. But we have found that digital bookkeeping can be almost too efficient. A year ago, a client contacted us about divorce. We asked him to forward three years of tax returns. When we spread the income and expenses on a chart to compare the three years, the numbers just didn’t make sense. 2020 was a crazy year and it’s a poor year to use to value a business. But while some expenses seemed consistent with others, other expenses were just crazy even if we discarded 2020. The business uses vehicles to provide services. In one year, the expenses were huge. In the next year there were basically no vehicle expenses. We alerted the client to these inconsistencies and suggested the accountant and bookkeepers needed to take a closer look. A new return resulted.
What we sought to avoid was the expense and headache of seeing the client’s spouse hire a forensic accountant. Forensic accountants basically review returns for the types of inconsistencies we had discovered. Theirs is a typically a deep dive into a company’s books and records. Lots of entrepreneurs like to play games with their records. They run expenses like their kid’s tuition, Jaguar lease payments, lawn care and vacations through the business and deduct them as business expenses so that their taxable income is reduced. There are hundreds of games like this which can vastly understate the business revenue and overstate expenses. This presents an unclear and arguable deceptive picture of both the income the business earns and the value it has to its owners.
Sometimes, this is done deliberately. Other times, these problems arise because the people collecting and compiling the data are not paying enough attention to how the data is processed. Either way, there is a huge problem inherent in producing inaccurate data and then having to “call it back.”
The answer is for the business owner to ask his/her own accountant to prepare a spreadsheet of income and expenses for 3-5 years before any formal request for information is answered. Once that document is prepared the business owner needs to ask the business accountant: “If you were my spouse’s attorneys, what holes or inconsistencies do you see in these numbers?” Often, the answers come easily, but they don’t if you never ask and proceed to produce documents that look aberrant. Then you are playing catch up in a world where you look like you are hiding or shading the facts.
