Usually, a single joint expert forensic accountant is appointed either by agreement or subject to a court order. The value of the business depends upon what a willing buyer is prepared to pay for the business as a going concern based on its current assets and performance. Although the valuation is based on the open market value, it is quite rare for a business to be sold in divorce proceedings, as this will destroy any income stream deriving from that business upon which both spouses rely.
Forensic accountants employ different methods to value businesses. The forensic accountant will either use the capitalised future maintainable earnings method or the net assets method in cases where the business owner owns the entire share capital of the company. The dividend yield method is employed when valuing minority shares in a business.
Capitalised future maintainable earnings method
This method calculates the amount of earnings, turnover, EBITTDA or post-tax profits of the business. A Multiplier is then applied, representing the number of future earnings a potential buyer might acquire-the price/earnings ratio. This price-earnings ratio is obtained by comparing similar businesses that have a known market value.
Net Assets Method
This calculates the assets of the business after taking into account its liabilities at a specific date, based on alternative assumptions:
- A breakup and sale of the business
- The sale of the business as a going concern.
This method is usually applied when valuing companies which own property portfolios, for example. In this scenario, a chartered surveyor will usually be appointed ahead of a forensic accountant to update the value of the property portfolio before a forensic accountant's report is obtained.
Dividend Yield Method
This method is used when valuing minority shareholdings. A minority shareholder is not able to influence the running of the company and can only rely on dividends. A minority discount may be applied to reflect the minority shareholding.