We were recently engaged by the liquidators of a security company to determine the value of goodwill arising from the transfer of the business to a phoenix company.
A phoenix company is where business operations are transferred from one company to another to avoid having to meet liabilities to unsecured creditors (particularly revenue authorities and employees). A phoenix company is reborn from the ashes of its earlier destruction.
Phoenix company activities are common in the construction industry and service based industries where it is simple to start trading again under another name with new suppliers. Unsecured creditors often contractors and small businesses are left out of pocket. The major creditor is usually the Australian Taxation Office.
One of the common characteristics of companies going into administration is poor financial records and often there is very little financial information in which to form an opinion as to the value of the business assets (tangible and intangible) being transfered to the new company.
In this case, we were able to reconstruct a strong view as to the profitability for the company from and examination of a short period of sales invoices and employment records. The security company provided personnel to act as security guards at clubs and hotels. The company charged an hourly rate for the guards attendance at the premises. We were able to link the invoices to employees wage records and establish a projected gross profit for the business.
By using other external data and our own experience as to the expenses associated with security companies. We were able to establish that the business was profitable and transfered a significant intangible business asset to the new company.