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What is sudden income deficit syndrome?

On Behalf of | Nov 13, 2023 | Divorce

Divorce can be a minefield, and it can get even trickier when a family business is in the mix. Enter sudden income deficit syndrome (SIDS) – a term you might not find in your typical finance textbook, but one that can be critically important in divorces involving a family business. SIDS describes a situation where, conveniently, around the time divorce proceedings start, a family company suddenly seems to be doing not-so-great financially.

Is it really struggling, or is there more than meets the eye? Oftentimes, sudden shifts in a company’s financial situation are manifestations of strategic moves by a spouse who is trying to take specific control of the business. By making the company appear less profitable, they’re aiming to sway the divorce settlement in their favor.

The impacts on divorce proceedings

This tactic can significantly skew the financial landscape of a divorce. The spouse out of the loop might find themselves short-changed in terms of immediate settlement and long-term financial security. It’s a manipulation of the system where the actual value of the business gets clouded by sudden, seemingly inexplicable drops in income.

How to spot and tackle SIDS

Look out for sudden changes in business performance that don’t align with market trends or past performance. Work with a forensic accountant if things seem amiss. These professionals can dig into the books, uncover discrepancies and bring the accurate financial picture to light.

Some of the more common tactics to look for include:

  • Missing cash receipts
  • Odd refunds
  • Payments going into ghost accounts for nonexistent vendors
  • Payroll entries for employees who don’t exist

In most cases, a dip in income occurs a few months before the divorce. While it might seem plausible that the business isn’t as profitable as it once was, you may also find clues that something isn’t right due to intentional interference.

Protecting yourself and your business

Stay informed and proactive if you’re involved in a divorce involving a family business. Understanding the concept of SIDS, keeping an eye on business finances and seeking legal guidance can make a difference in better ensuring a fair settlement.