With a forensic accountant as an advisor, a client can be given a swift measured opinion.
Here at Stowe Family Law we have our own in-house forensic accountancy department. It happened more by accident than design.
About four years ago, I had lunch with a partner at a well-known accountancy firm. I had encountered him professionally on a number of occasions, when he had acted for our clients and against them. I was impressed, as I knew local barristers were, by his sensible, moderate and economic approach. He didn’t waste time and money asking questions that made no difference to the outcome. He was good at giving evidence and his concise opinions were respected by the court.
As we had lunch it dawned on both of us that we could work together, to offer a novel service to our family law clients that other firms did not. We shook hands there and then. This was how the accountant in question, Nick White, came to join us. It was as simple as that. I liked him, I trusted him and I trusted him to advise our clients. The arrangement has worked very well, and Nick White now heads our flourishing forensic accountancy team.
It means that when clients come to see us, there is no frustrating wait for financial information before we can advise on tactics. Instead, we can begin work immediately. This is particularly pertinent when we have to consider a freezing order (known as a Worldwide Mareva) against a client’s spouse. In such a case, time is of the essence.
With access to Companies House and global databases, Nick can download information, analyse it immediately and advise us where to concentrate our efforts. He can tell us if the client is likely to be chasing rainbows, or if there really is something worth looking at. He can provide immediate advice about the likely scale and nature of a case.
On occasions, a client’s understanding of a spouse’s financial situation does not match the reality. With a forensic accountant as an advisor, the client can be given a swift measured opinion at the first or second interview.
Similarly, our forensic accountants can provide advice about the likely value of a client’s business for the purpose of a divorce.
This is useful because business values may be artificially inflated or deflated by the client, for a variety of reasons. Because he is an independent, professional advisor, Nick’s eagle eye and “broad brush” approach can keep a client’s expectations in tune with reality. We can focus on taxation, liquidity, settlement and methods of payment – all of them art forms. Payment terms require skill to negotiate so that the client walks away satisfied with the outcome. This is particularly so if that client is seeking a clean break without the prospect of maintenance payments stretching out into the future, or the unwelcome possibility of a future additional capital payment (under section 31 of the Matrimonial Causes Act 1973, which I have examined in a previous post).
The capitalised value of a business is always a tough issue and often contentious. Because it is dependent on the outcome of separate valuations, one spouse may be advised to ask for too much – and the other spouse may be advised to offer too little. A substantial amount of costs can be wasted by concentration on a wholly artificial exercise because the business is not going to be sold. Rather, its capital value will taken into account when considering a capital award for a spouse. When a business is sold on the open market, the transaction takes place between a willing buyer and a willing seller, both of whom are acting for self-interest and gain. In the case of a divorce, however, different principles apply.
This thorny issue was recently considered by Mr Justice Moylan in the case of H v H (2008) EWHC 935.
Mr Justice Moylan is a “safe pair of hands” and his awards, never overly generous in my experience, are unlikely to be set aside on appeal. In this case, the Judge clearly felt that from the outset, the parties had adopted the most extreme of positions. The wife had asked for too much and the husband had offered too little. They were litigating over the capital value of a successful restaurant business, which had been owned by the husband long before this marriage (his second) had taken place, and in which he intended to continue to work.
Two forensic accountants gave differing opinions as to the value of the business. The husband’s accountant stated £1.7 million; the wife’s accountant stated £5.3 million. Quite a difference! The husband’s legal costs, including accountancy evidence, totalled £126,000; the wife’s, £280,000.
The Judge began by quoting from Lord Nicholls in the House of Lords case, Miller v Miller; McFarlane v McFarlane (2006), UKHL 24. “Valuations are often a matter of opinion on which experts differ. A thorough investigation into these differences can be extremely expensive and of doubtful utility…. This is to misinterpret the exercise in which the court is engaged…a broad analysis, not a detailed accounting exercise”.
Mr Justice Moylan stated that in his opinion, to seek to construct an award based on a broad valuation of a business could be unfair – particularly since valuations of private companies “are among the most fragile valuations that can be obtained”.
But how is such a substantial asset in a marriage to be valued? Evidently not by the detailed exercise in which these parties became involved!
Both accountants had managed to agree that an “Enterprise Value” was an appropriate methodology. This is an assessment of future maintainable earnings (FME) and application of a multiplier to those earnings, in order to calculate the capital value of the business. The wife’s accountant, however, contended for FME of £856,000; the husband’s, of £633,000. The wife’s accountant applied a multiplier of 9; the husband’s, a multiplier of 6. The parties then argued about the multiplier and about a number of other complex issues affecting the final figure. The judge patiently considered them all, in the interests of fairness to both parties, but made it clear that he was not validating the exercise.
The Judge decided upon an FME of £725,000 and a multiplier of 6.5, which gave a net business valuation of £2.5million. He found the husband’s involvement of more than 33 years in the business as a relevant pre-marital contribution, and rejected the wife’s application for equal division of capital.
Mr Justice Moylan expressly referred to fairness as the overriding principle. He assessed the wife’s needs and, although both parties had argued for the wife to be given a clean break, (the husband on the basis of an excessively low capital award, the wife on a near wipe-out of the husband’s capital), found a clean break to be unachievable. He awarded the wife capital and continuing maintenance. Presumably, this satisfied neither party. After all, they had racked up joint legal costs of £400,000!
So what conclusions should be drawn?
Sometimes it is hard for advisors to stand back from their clients and take a birds’ eye view. But in cases such as this, advisors need to remain objective. Fairness requires less subjectivity and more of a meeting of minds.
I would recommend that in most cases, a single joint experts’ report should be obtained to value business assets. My preference is for less analysis, which I find many forensic accountants adopt when preparing their reports. Perhaps this is with an eye to professional liability – it is hard to say. However, I believe accountants could and should be comfortable with a “broad brush” approach.
In a case such as H v H, by agreeing to an even higher valuation than that adopted by the Judge, perhaps that £400,000 could have been better used to meet the parties’ needs. The focus could then have fallen upon how the payment would be made, and over what period. By agreeing the maintenance to be paid until the capital sum had been paid in full, fairness and certainty would have been achieved for both parties. Finally, the spectre of section 31 of the Matrimonial Causes Act 1973 would also have been avoided.