Chapter 12 – Business Lifestyle Analysis

Standard

Closely held businesses present special challenges in the family law setting. Typically, only one spouse is actively involved in the business. Therefore, not only does the spouse control the family’s finances, but he or she also controls all of the records of the business. When the spouse who does not work actively in the business attempts to quantify the income from the business or the value of the business, the spouse who works in the business daily can purposely (and often very effectively) obstruct efforts to get accurate and complete data.

Certain types of businesses, such as restaurants and retail stores, can be prone to manipulation because they have so many cash transactions. Construction companies, real estate ventures, and auto dealerships are notorious for “creative” bookkeeping. Professional service providers, such as doctors, dentists, and attorneys, are at risk for financial maneuvering because it is so difficult to verify the amount of professional services actually provided to patients or clients.

Any closely held business having finances that are easily manipulated by the owner is at risk. If this happens, the “out” spouse is left looking for alternatives to get to the bottom of the finances. Techniques used in the personal lifestyle analysis can also be applied to businesses to ferret out the truth about the money.

Evaluating Income

A company’s current income should be compared to historical income, and the reasons for any changes over time should be determined. Any substantial one-time sales that will not recur (or will recur only infrequently) should be considered when projecting future income.

It is not unusual for the revenue of a closely held business to drop dramatically around the time of the filing of a family law case. The spouse who is active in the business may attempt to make it appear as if the business is failing. A failing business has a lower value to be divided between the spouses, and a failing business also means there is less income from which support can be paid.

The financial expert should consider whether the income of the company has fallen because a new subsidiary or related third party has been created to receive the income. This could be an attempt to shield income from the family law case or otherwise deprive a spouse of a share of assets or income.

If income has gone down after the filing of the family law action, related expenses should be evaluated to determine if they have decreased proportionately. This is discussed in more detail in the next section of this chapter.

An analysis of revenue by customer should be completed to determine if any long-term customers have disappeared from the accounting records. It is possible that those customers are still purchasing from the company, but the revenue is not being recorded in the financial statements.

Cash businesses can be especially difficult to investigate. They include those that traditionally deal with higher volumes of cash, such as restaurants, bars, gas stations, convenience stores, fitness studios, laundromats, landscapers, salons and spas, and other retail stores. Certainly, there has been a shift to payments with credit cards and debit cards, but in some of these businesses, a substantial percentage of business is still transacted with cash.

Also included in this chapter:

Business Types
Documents to Analyze
General Financial Analysis
Evaluating Income
Evaluating Expenses
Evaluating Assets
Evaluating Liabilities
Evaluating Capital Accounts
Looking for Red Flags
Verifying Data