Understated earnings (valuation, divorce, tax contexts)

Owners understate earnings to reduce a business valuation, a marital estate, a buyout price, an earn-out, or a tax liability. Methods include running personal expenses through the business, diverting or deferring revenue, paying related parties, and overstating reserves.

Fully covered.

Starter pack: Not part of a starter pack

Red flags

In the data

• Margins or revenue decline around the measurement date without an operational reason
• Expense categories rising faster than revenue
• Vendors that match the owner, family members, or employees

Behavioral

• Pending divorce, buyout, or valuation dispute
• Owner resists producing detail ledgers

Internal controls

• Owner controls all disbursements and recordkeeping