Divorcing a Business Owner: Do I Need a Forensic Accountant?
If you’re divorcing a spouse who owns a business, you likely need a forensic accountant. Business owners often hide income, underreport profits, or mix personal expenses with business costs. A forensic accountant can uncover the real financial picture and ensure you get what you deserve in your divorce settlement.
This decision affects your child support, spousal support, and property division. Without proper financial analysis, you could walk away with far less than your fair share.
At RM Law Group, LLP, our divorce lawyers in Irvine, Cerritos and San Bernardino are here to help you every step of the way. We know when to hire a forensic accountant and how to utilize their expertise to protect your interests during divorce. Call our family law firm now at 866-706-3160.
What Does a Forensic Accountant Do in Divorce?
A forensic accountant doesn’t just crunch numbers – they investigate financial records to find the truth behind business finances.
Their main job is determining accurate income. Business owners frequently report lower profits on tax returns than they actually earn. This happens because they deduct personal expenses as business costs or simply don’t report all their income.
When Greg Rafael of CROSSCOR, a forensic accountant with over 20 years of experience, met with RM Law Group, LLP, he explained that business value comes directly from income:
“The more profitable a business is, the more valuable the business. But the question is, is the profit that the client or litigants see the real profit of the business, or is it below what it really is?”
Why Business Owners Hide Income
Business owners resist financial disclosure for two main reasons:
They view the business as “their baby.” Even if the business was built during marriage with community funds, owners often feel entitled to keep the entire enterprise. They built it, they run it, so they think it belongs only to them.
They’re hiding unreported income. Many business owners, especially those dealing in cash, underreport their earnings to avoid taxes. During a divorce, they fear getting caught and facing IRS consequences.
This resistance means you need professional help to uncover the real numbers.
The Add-Back Process: Finding Hidden Income
Forensic accountants use a technique called “add-backs” to find the true business income. They start with the profit shown on tax returns, then add back personal expenses that were wrongly deducted as business costs.
Common examples include:
- Country club memberships for businesses that don’t benefit from networking
- Personal meals labeled as business meetings
- Family vacations claimed as business travel
- Personal vehicle expenses for spouses who don’t work in the business
Is It a Job or a Business?
Not every business has real value beyond providing the owner a paycheck. Forensic accountants determine whether your spouse has an actual business worth dividing or simply a well-paying job.
The replacement value test works like this: If your spouse could hire someone with the same skills and experience to run the business, and that person’s salary equals the current business profit, then it’s just a job. Only profits above replacement cost create real business value called “goodwill.”
For example, if a lawyer could earn $250,000 working for another firm, and their practice only generates $250,000 in profit before paying themselves, there’s no business value to divide. But if the practice generates $350,000 in profit, that extra $100,000 creates goodwill worth dividing.
Three Ways to Value a Business
Forensic accountants use three main approaches:
- Market Approach: Market approach compares the business to similar companies that have been sold recently. This method uses multipliers like “price to revenue” ratios based on industry standards.
- Income Approach: The income approach calculates value based on future cash flow projections. This method works better for larger, established businesses.
- Cost/hybrid Approach: This combines tangible assets (equipment, inventory, vehicles) with goodwill value. Courts prefer this “excess earnings approach” because it’s straightforward and reliable.
The significance of accurate valuation is huge. If the business gets overvalued, the spouse buying out the other pays too much. If undervalued, the spouse receiving the buyout gets cheated.
When Cash Businesses Complicate Divorce
Cash-heavy businesses present special challenges in a divorce. Owners dealing primarily in cash often don’t deposit their earnings, leaving no paper trail to follow.
Forensic accountants use “net worth tests” in these situations – essentially asking, “How can someone afford this lifestyle on their reported income?” If your spouse drives luxury cars and lives in an expensive home while claiming poverty, something doesn’t add up.
The Real Estate Factor
If your spouse owned real estate before marriage, community property law gets complicated. When you use marital funds to pay the mortgage, you gain an “equitable interest” in the property.
Forensic accountants calculate exactly how much of the property’s value belongs to each spouse using contribution and apportionment formulas. This process considers:
- Down payment made before marriage (separate property)
- Mortgage payments made before marriage (separate property)
- Mortgage payments made during marriage (community property)
- Property appreciation during marriage (divided based on contributions)
Refinancing complicates everything. Each refinance dilutes the community’s contribution to the original mortgage, potentially reducing your share of the property value.
When to Hire a Forensic Accountant for Your Divorce
You definitely need a forensic accountant if your spouse:
- Owns any type of business, especially cash-heavy operations
- Claims low income but maintains an expensive lifestyle
- Has previously owned real estate that community funds helped pay for
- Mixed separate property with marital assets
- Shows reluctance to provide complete financial documentation
The earlier your divorce attorneys involve a forensic accountant, the better. They can guide document requests and prevent your spouse from hiding assets or manipulating financial records.
Contact Our Orange County Divorce Lawyers Now!
Divorcing a business owner requires specialized expertise. Don’t try to handle complex financial analysis on your own. A qualified family law attorney at RM Law Group, LLP will work with a forensic accountant to protect your interests and ensure you get your fair share.
The stakes are too high to guess about hidden income or business values. Your financial future depends on getting accurate numbers, not accepting what your spouse claims the business is worth.
Don’t try to handle this alone. Call our divorce legal team at RM Law Group, LLP at 866-706-3160 or fill out our confidential contact form for a free consultation about your divorce case. Our family lawyers will help you through this phase of life, so you can move into a brighter future.
Jason Martinez is a co-founding partner of RM Law Group, LLP. His practice focuses exclusively on California Family Law and community property division, including litigation and settlement of complex and high-conflict divorce and child custody proceedings. Jason understands that divorce and family law issues have long-term effects on all family members, especially the children.
