This article by family-law attorney Lisa Ann Sharp and Stacy Preston Collins, CPA and business-valuation expert, briefly summarizes common ways divorcing parties may try to manipulate a business’s value.

Divorce and Deception: Dirty Little Tricks of Business Valuation and How to Bust Them

When a marriage dissolves, particularly in cases involving significant assets, the value of a business often becomes a central point of contention. Unfortunately, “bad behavior” by one spouse—usually the one controlling the business—can seriously skew the business valuation, leading to unfair or unjust settlements. These tactics can range from intentional undervaluation to more sophisticated forms of financial manipulation, all aimed at reducing the overall asset pool for division.

I recently sat down with forensic CPA Stacy Collins, and together we uncovered some of the most common deceptive tactics used in business valuations during divorce proceedings. These strategies can dramatically alter the true financial picture, but with the right tools and expertise, they can be identified and corrected. Here’s a preview of the “horror stories” we discussed and how forensic accounting can help ensure fairness in these complex cases:

Intentional Undervaluation of Business Assets. One spouse may manipulate financial records, hide assets, or inflate expenses to make the business appear less valuable, effectively reducing the portion subject to division. As Stacy explained, forensic accountants look for patterns—such as sudden declines in asset values or unexplained transactions leading up to the divorce—that could indicate an attempt to artificially depress the business’s worth.

Lack of transparency when requesting records is also a red flag.

Shifting Personal Expenses to the Business. A common tactic is disguising personal expenses as business expenses, lowering the apparent income of the business and thus its value. Stacy emphasized the importance of examining expense categories—particularly large or unusual ones like travel, entertainment, or meals—that may hide personal spending. By digging into general ledgers, credit card statements, and the details behind these expenses, forensic CPAs can uncover patterns that show intentional understatement of business value.

Delaying or Accelerating Revenue. Another manipulation involves changing the timing of revenues and expenses to distort the business’s financial health. Stacy shared a striking example: a business owner who delayed their annual bonus payment until after the divorce was filed to make their income appear lower. Through careful analysis of income patterns, bank statements, and payment records, Stacy was able to reveal this manipulation, demonstrating the importance of investigating both revenue and timing when evaluating business performance.

Hiding Business Assets or Revenue. Assets can be transferred to other entities or hidden offshore, making it harder for the opposing spouse to get an accurate picture of the business’s true value.

Stacy clarified getting general ledgers can be one of the most important tools, because sometimes the answers are in there, and sometimes they’re obvious, and sometimes they’re not.  She also wants to see bank statements and credit card statements. Bank statements and general ledgers often provide the answers, although they may not be obvious without doing a lot of analysis and kind of connecting the dots.

Inflating Liabilities. Creating or exaggerating liabilities is another way business owners try to reduce the company’s net worth on paper. Stacy shared an example of a business that paid double bonuses just before a divorce filing, a move that significantly depleted the company’s cash reserves. Without smoothing out these irregularities, the value of the business would have been unfairly diminished.

Pre-Divorce Asset Transfers. In some cases, business owners may “gift” or transfer assets to friends or family with the understanding that these assets will be returned post-divorce. Forensic accountants like Stacy focus on tracking these transfers, often hidden in complex financial structures, to ensure the full value of the business is captured in the divorce.

Failure to Disclose Side Businesses. Failure to report side businesses or off-the-books activities can significantly skew valuations. Stacy explained how forensic accountants examine financial records over multiple years to detect changes that could indicate the presence of undisclosed income streams or businesses. Looking for unusual expenses or sudden shifts in financial performance often provides the clues needed to uncover hidden ventures.

Manipulating Valuation Approaches. The method used to value the business can also be manipulated. A controlling spouse might push for a valuation method that benefits them, such as relying on book value rather than a more comprehensive approach like discounted cash flow (DCF) or market value. Stacy highlighted the importance of selecting the right valuation method based on the business’s structure and future prospects, ensuring a fair outcome for both parties.

Misrepresenting Future Business Prospects. Another deceptive tactic is painting an overly pessimistic picture of the business’s future. By downplaying growth or profitability, a spouse can artificially lower the present value of the company in divorce negotiations. Stacy emphasized the importance of understanding market trends and realistic projections to arrive at a fair valuation.

It’s clear that forensic accounting plays a critical role in revealing these manipulations and ensuring that valuations are accurate and just. As family law attorneys, understanding these tactics is key to protecting your clients and securing fair settlements.

This article was originally published by the American Academy of Matrimonial Lawyers (AAML) and is republished with permission.

Source: Divorce and Deception: Dirty Little Tricks of Business Valuation and How to Bust Them (American Academy of Matrimonial Lawyers, Fall 2024).

If you find this helpful, please share it using the buttons below.