In this episode of The Jennifer Hargrave Show, Jennifer sits down with forensic accountant Robert Bailes, owner of Bailes & Company, to explore the complex world of business valuations, separate property tracing, and forensic accounting in divorce cases. With decades of experience, Robert sheds light on how financial investigations are conducted during high-stakes divorces, particularly those involving closely held businesses and high-net-worth individuals.

The conversation begins with a discussion on the true causes of divorce—often rooted in mental illness and financial mismanagement rather than just monetary issues. Robert details the meticulous process of business valuation, highlighting the role of personal goodwill, discretionary expenses, and the realistic value of an enterprise when removed from its owner. He explains how closely held businesses are treated as assets in divorce and why owners should not panic about invasive evaluations.

The two delve into tracing separate property, emphasizing the importance of record-keeping—especially for inherited or pre-marital assets—and how gaps in documentation can turn separate property into community property. They also tackle forensic accounting, outlining how professionals uncover financial truths and why it’s more common to find wasted money rather than hidden assets.

Finally, Robert offers hope to those going through a divorce, emphasizing healing and clarity on the other side. This episode is a must-listen for business owners, spouses, and anyone seeking to understand the financial intricacies of divorce with practical, expert insight.

Jennifer Hargrave: As a mother, wife, and divorce attorney for over 15 years, I’ve learned a lot about navigating times of uncertainty, transition, and growth. I’m so glad you’re joining me today. If you’re worried your spouse might be hiding assets or that the business you’ve built with your partner won’t be fairly valued in a divorce, then you won’t want to miss this episode.

Today, I’m joined by Robert Bailes, owner of Bailes & Company. Since 1991, Robert has been advising individuals and businesses on tax planning, financial matters, and fraud investigations. While divorce isn’t his only focus, his expertise is often called upon in divorce proceedings. Robert, welcome to the show.

Robert Bailes: Thank you.

Jennifer: Let’s dive right in. It’s often said that financial issues are a leading cause of divorce. Do you see that reflected in your work?

Robert: Not as much as you’d think. I see mental illness as a more frequent cause. But financial irresponsibility—like blowing through savings, risky investments, or spending on affairs—is definitely an issue. It goes both ways, but generally, it’s the men.

Jennifer: I’m sure in your line of work, you’ve seen it all. What types of clients do you typically work with in divorce cases?

Robert: Mostly high-income or high-net-worth individuals, especially those with closely held businesses. These cases are complex and justify the investment in financial analysis.

Jennifer: Let’s define some terms for our audience. What qualifies as “high net worth”?

Robert: Generally, a net worth of a million dollars or more—meaning total assets minus liabilities.

Jennifer: And a “closely held business”?

Robert: Typically, a small group—maybe one to five people—own and operate the business. Often it’s a solo entrepreneur. These are usually businesses someone built from the ground up.

Jennifer: It can be really tough when a business finally starts succeeding, and then divorce happens.

Robert: Absolutely. Entrepreneurs are married to both their spouse and their business, and sometimes the business wins.

Jennifer: When is it appropriate to have a business valued during a divorce?

Robert: Anytime the business is an asset that needs to be divided. It’s rare for spouses to remain co-owners post-divorce. Valuation helps determine how to fairly offset the business’s value with other assets.

Jennifer: We often put businesses on the asset spreadsheet, right along with houses and accounts. What goes into valuing a business?

Robert: We assess the business’s assets, debts, and—most importantly—its income. We calculate what a third party would pay for the equity in the business.

Jennifer: So, it’s not about what the owner thinks the business is worth to them, but what it would sell for to someone else.

Robert: Exactly. And in Texas, if the owner could compete post-divorce, it can really lower the business’s value due to something called personal goodwill.

Jennifer: Personal goodwill is essentially the part of the business tied to the individual—their relationships, reputation, and expertise, right?

Robert: Correct. It’s not considered part of the divisible marital estate.

Jennifer: So removing the individual from the equation can significantly reduce the business’s value.

Robert: Yes. Especially for professional practices like doctors, lawyers, or CPAs where the business is built around one person.

Jennifer: What are other common challenges when valuing a closely held business?

Robert: Discretionary or personal expenses run through the business. Small business owners often have the business pay for items like cars, country club dues, or family salaries. We identify and add those back into the income to assess true profitability.

Jennifer: That can significantly impact the valuation.

Robert: Definitely. It’s not shady—it’s just part of running a small business. But we also need to assess the cost to replace the owner’s work if they’re highly involved.

Jennifer: Some owners fear that a valuation will disrupt their business operations. How invasive is the process?

Robert: Not very. We work from existing financial statements and tax returns, usually through the business’s accountant. It’s confidential and minimally disruptive.

Jennifer: Unless there’s shady stuff going on!

Robert: [Laughs] Yes, then people get nervous. But our job is to look at the numbers objectively.

Jennifer: Any advice for spouses of business owners?

Robert: Don’t assume the business is worth as much as it appears. High income doesn’t always mean high business value—especially when the owner’s presence is essential.

Jennifer: And what about the fear that divorce means the business must be sold?

Robert: That’s rare. Most divorces settle—usually around 95%. Often, one spouse keeps the business and buys the other out over time, either with cash, other assets, or structured payments.

Jennifer: And you want that payment structure to be sustainable.

Robert: Exactly. You don’t want to push someone into default. Since alimony isn’t tax-deductible anymore, we often stretch payments out longer.

Jennifer: Sometimes a line of credit helps bridge the gap.

Robert: Yes, or a combination—upfront cash and long-term payments. Each situation is unique.

Jennifer: Let’s shift to tracing separate property. In Texas, everything is presumed community property unless proven otherwise. What does tracing involve?

Robert: It’s tracking assets from before the marriage or from inheritance/gift through to the present. It requires a clear paper trail. If there are gaps, courts can rule it’s community property.

Jennifer: That’s tough in gray divorces or long marriages. Records go missing, and most people don’t keep statements beyond seven years.

Robert: Exactly. If you’re getting married or receiving inheritance, keep detailed records. Better yet, use paper copies. Digital formats may not be accessible decades later.

Jennifer: Another option is holding assets in a legal entity like an LLC.

Robert: Yes, that can help. But be sure to get good legal advice. Don’t rely on LegalZoom.

Jennifer: Let’s talk about forensics. When someone suspects asset hiding, what’s your approach?

Robert: We examine the big picture: where money comes from, where it goes, and how it’s managed. Often, assets aren’t hidden—they’re wasted. Gambling and affairs are common drains.

Jennifer: What about crypto or digital currencies?

Robert: We haven’t seen much, but it’s likely happening. Crypto bought with cash is hard to trace. We also now check Venmo and PayPal for hidden funds.

Jennifer: Even so, forensic investigations are expensive and may not always be worth it.

Robert: Correct. Cost-benefit matters. And if someone operates heavily in cash, it’s nearly impossible to uncover everything.

Jennifer: Robert, before we wrap up, what hope do you offer people going through a divorce?

Robert: My hope is they get through it with as little emotional distress as possible and start a better chapter. That’s why I do this—to help people through hard times and see them come out stronger.

Jennifer: Thank you, Robert. Your insights are invaluable. For more information on Robert and Bailes & Company, check the links in our show notes. Until next time!