Adding the Value: Business Valuation Expertise in Divorce Litigation – Part Two

In my last blog post, I explained what an active/passive appreciation study is, scenarios in which it would be conducted and the value that a business valuation expert brings to the table when performing the analysis. As a refresher, an active/passive appreciation study is often required in matrimonial litigation when an existing business or business interest is owned by one spouse prior to the marriage, or is gifted or bequeathed to one spouse during the marriage. Since we have covered the basics, we can now dive deeper and discuss the various phases and steps of an active/passive appreciation study.

The easiest way to digest the steps of an active/passive appreciation study is to think of the process in two phases. The first phase requires the preparation of appraisals of various business interests at different points in time. The variations here depend on when and how the business interests were acquired – if the business interests were brought into the marriage, the business interests are valued as of the date of the marriage, which could require a retrospective appraisal going back decades. If the business interests were gifted or inherited by a spouse during the marriage, the business interests are valued as of the date of each gift or inheritance. Regardless of the acquisition date, the business interests must then be valued a second time as of the date of separation (in some jurisdictions called the date of filing), and then a third time as of the date of distribution (also called the date of trial in some jurisdictions). The final step in the first phase is to calculate the changes in value of the various business interests between the date of marriage, gift or inheritance and the date of separation, and then between the date of separation and the date of distribution.

At this point, after numerous valuations of business interests have been prepared at multiple points in time, the second phase of the active/passive appreciation study can begin. In the second phase, the business valuation expert must determine why the business interests changed in value during the marriage and then between the date of separation and date of distribution. The expert also must differentiate between changes in value due to marital funds or the efforts of one or both spouses versus changes due to external market forces or the efforts of other individuals. Each of the economic, industry, capital market and other analyses performed in appraising the various business interests in phase one must be taken into consideration in determining the factors that measurably contributed to the change in value between the relevant dates. It is crucial for the business valuation expert to always be cognizant that the end objective is to determine the amount and reason for changes in value. Because of this, all of the research and analysis conducted in preparing each valuation must be undertaken in anticipation of doing more with the data than just valuing the business interest at each point in time.

If you are interested in learning more about how you can strengthen your case with a business valuation expert, or want to learn more about our services and our team, please contact us.