When going through a divorce, determining the marital value of private business interests can often get tricky – this is especially true if one spouse has a separate ownership interest in a business. 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. The majority of states have matrimonial laws that dictate that the preexisting, gifted or inherited business interest remains the separate property of the owning spouse, however, the marital estate can gain an equitable interest in increases in value during the marriage that are caused by marital funds or active efforts of one or both spouses. Sound tricky? That’s because it is – and that’s why experienced business valuation experts are essential.
It is important to note that an active/passive appreciation study includes business valuations – but it goes much further and it is much more complicated. In an active/passive appreciation study, one must consider the traditionally applied relevant valuation approaches and methods, but along a time continuum, rather than just at a particular point in time. Additionally, the discovery process is more in-depth as there typically is a longer time period for which information must be gathered. This process can include interviews with multiple individuals, even including former employees who left the company years earlier. Through diligent research and analysis, the valuation expert must be able to identify the main drivers that measurably impacted the changes in value and determine the relative impact of each value driver between different points in time.
Divorce attorneys would be wise to bring in a business valuation expert who has deep business valuation experience and training early on in the process to perform multiple valuations that could possibly date back decades. I also recommend that the expert have specific experience in active/passive appreciation studies due to the numerous interacting variables in the company being appraised, as well as the need to be aware of and take into consideration relevant state statute and case law. It is crucial for the legal team and the business valuation expert to work closely together, as many state statutes provide only high-level parameters and limited specifics regarding active/passive analyses. It is the legal team’s role to provide legal guidance to the business valuation expert on the interpretation of the relevant statutory and case law. Teamwork between the legal team and the business valuation expert is essential to the efficient development of a relevant, reliable and defensible active/passive appreciation study.
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.