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Active Passive Appreciation Analysis

SITUATION

A settlement offer made by a husband to his wife during the course of their divorce and equitable distribution case was declined by the wife.  She subsequently hired a business valuation expert.  The Husband’s attorney hired FSS to value the business interests in the marital estate, opine on active passive appreciation issues, rebut the opinions of the wife’s expert, and to testify in court regarding our findings and opinions.

Several issues were present in this case, including but not limited to:

  1. The validity of a trust in which the husband’s separate assets were transferred prior to marriage;
  2. The value of separate and marital business interests; and,
  3. Identifying and quantifying factors that caused changes in value of separate and marital business interests during the marriage.

The opposing expert presented a value of the marital business interests in excess of $10 million in their report and deposition. Based upon our valuations and active passive appreciation analysis, FSS found no marital value.

STRATEGY

FSS relied on their engaging counsel regarding the validity of the trust, as this was a legal issue rather than a valuation issue.

We valued the business interests using recognized and generally accepted valuation methods.  We performed an active passive appreciation analysis to estimate the marital and separate values of the business interests as of the date of separation.  In performing the active passive appreciation analysis, we relied upon our extensive experience as applied in accordance with our engaging counsel’s interpretation of North Carolina equitable distribution statute and case law .

RESULTS

In addition to providing reliable business valuation and active passive appreciation opinions, the work performed by FSS resulted in our finding and bringing to the attention of our engaging counsel the following:

  • The opposing expert developed untested valuation and tracing methods rather than using recognized and generally accepted methods;
  • The opposing expert performed insufficient due diligence – spending only approximately 5 hours on the analysis of each of 33 entities – and did not interview anyone at the companies other than their client;
  • The opposing expert opined on the value of real estate income streams, even though they were not licensed in real estate appraisal; and,
  • The opposing expert effectively failed to perform an active passive appreciation analysis in accordance with generally accepted practice, and in the manner that our engaging counsel determined is required by NC statute and case law.

In the end, the work of FSS contributed to the case settling during early stages of the trial, with the wife accepting less than 4 percent of the amount opined by her expert.