Forensic Accounting for Racking Repair Enterprise

Situation

A dispute arose between the founder of a racking repair enterprise and a new partner after a year in business together. The partners could not agree on equity disbursements. One partner engaged in a side business related to the industry on company property, presenting a conflict of interest. Each side wanted to end the partnership, but neither could agree on how to split in an equitable fashion. Resolute was engaged to complete three important tasks for the racking repair enterprise:

• Thorough forensic accounting

• Determination of shareholder equity

• Business valuation

Strategy

This engagement presented challenges to typical forensic accounting and financial analysis practices, and required creative solutions to provide value to the clients. Challenges faced included lack of proper support documentation; absence of proper inventory protocols; third-party assets located on company property; mingling of assets from a prior business venture and personal funds; and common use of company space by one partner’s side business.

Resolute’s efforts in forensic accounting included a thorough review of P&L statements and COGS that allowed identification of any unusual spending patterns, as well as established how each partner contributed to the customer base.

The shareholder analysis included a review of capital contributions and a thorough evaluation of equity accounts. Forensic Analysis of expenses identified multiple assets mislabeled and attributed to incorrect balance sheet representation and tax implications. A company vehicle purchased with the trade-in of a personal vehicle required a custom loan amortization schedule to unwind the funding and balance the asset list.

The business valuation posed a challenge. The clients needed to understand the worth of the company to properly dissolve the partnership, but had a limited budget. Value of this unique industry was difficult to determine. The founder had access to the sole North American license of a patented repair solution for industrial racks, which was difficult to derive current market value. Resolute was able to craft a custom valuation projection that properly addressed the unique business challenges, while satisfying both partners.

Solution

Through Resolute’s in-depth financial investigation, the founder was able to buy out the new partner’s interest in the company and dissolve the troubled partnership.