July 2020
In addition to “mainstream” work such as loss of profits cases, matrimonial disputes and fraud investigations, forensic accountants assist in the administration of estates. The work can be wide-ranging and may include the valuation of the deceased’s interest in a business as well as other valuation issues in relation to estates and the quantification of claims or aspects of claims if beneficiaries allege negligence or fraud against executors or initiate proceedings against each other.
Valuation of the Deceased’s Interest in a Business
The valuation of the interest of a deceased proprietor, partner or shareholder in a business will often follow in broad terms the approach used for other purposes such as a sale of the relevant interest. For a trading company, the normal procedure is to apply a multiplier to the estimated annual future profit stream of the business to obtain a value for the business as a whole and then to consider the value of the relevant interest. It may however be necessary for probate purposes to consider whether a discount should be applied to the value of the business given the absence of the deceased director/partner. It will be necessary in any event to follow established practice in the valuation of minority shareholdings for probate purposes.
It is important to compute the value of a business on the basis of information which would have been available to a prospective buyer at the date of death. In a valuation of a restaurant which we carried out, it was necessary to take into account the significant uncertainty at the time of the death of a partner as to whether a recent refurbishment would have increased profits and effectively to ignore the actual increase in profits after the death of the partner.
Other Valuation Issues
In some cases, the approach to business valuation described in the previous paragraphs may not be appropriate. We have been involved, for example, in computing the value of a deceased partner’s interest in a GP practice. As such practices are not generally valued by reference to future profits, we focused on ascertaining the amounts due to the estate from the practice. As part of this work, we considered issues relating to the estate’s interest in freehold property owned by the practice and in the associated mortgage loan and insurance policies taken out by the practice on the partners’ lives.
In a case involving two beneficiaries, one had a life interest in an estate with the other becoming absolutely entitled thereafter. We computed a range of values attributable to the life interest in the context of prospective negotiations between the beneficiaries.
Quantification of Claims
Claims of negligence or maladministration against executors may arise from allegations such as:
- failure to account for funds properly, which may result in errors or mis-statements in estate accounts;
- delays by executors resulting in losses to the estate, e.g. because of falls in asset prices during the administration of the estate, or leading to loss of interest income;
- inappropriate valuations of assets such as interests in private companies; and
- unreasonable expenses incurred by executors.
In one case, we carried out a critical examination of the cash flows passing through estate accounts as a result of the realisation of assets, the settlement of expenses and distributions to beneficiaries. We computed interest potentially lost by one of the beneficiaries as a result of the way in which the executors had managed the estate’s cash and allocated the interest received between the beneficiaries.
Conclusions
Despite the forthcoming recession, increasing personal wealth in recent years has enhanced the value of many estates, making it more likely that financial issues will arise during the administration process and that specialist advice will be needed. In such circumstances, it may be preferable to instruct expert accountants as opposed to accountants who have customarily acted for specific family members and/or their businesses.
Download a pdf of this article
The information contained in our Newsletters is provided as general information only. It does not constitute professional advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. In addition, since the Newsletters were published in recent years, the information contained in them may not be applicable at the current time.