In the sometimes contentious realm of divorce proceedings, the role of forensic services becomes increasingly vital. Last month’s article, “Valuation of a Business for Divorce: Overview of Valuation Approaches and Normalizing Adjustments,” shed light on the complexities of valuing a business, describing the three approaches: the asset-based approach, the income approach, and the market approach. The article also emphasized the importance of “normalizing adjustments” which act as a corrective lens, adjusting the income statement to portray the financial results from the ordinary operations of a business, as well as ongoing earnings capacity of the business.
Valuations of a closely held business in the context of a contentious divorce can be especially multifaceted and may require additional forensic investigative scrutiny for any irregularities in the financials in anticipation of the divorce and valuation. In valuations for divorce, certain adjustments may impact and/or require further forensic services such as income determination, tracing services, lifestyle analyses, marital vs. separate analyses, and more.
Examples of such adjustments may include, but are not limited to:
It is important to consider these types of situations if only one spouse is involved with the operations and management of the company, otherwise referred to as the “in-spouse.” That spouse may, or may not, have been altering the financial position of the business in anticipation of divorce and a potential independent business valuation. The services of a financial expert can be vital to you and your client in such matters, as the accuracy of the valuation may impact the equitable distribution of the marital assets.
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