Ashok Abbott, Ph.D & Timothy C. Voit, Financial Analyst

Divorce attorneys are encountering business valuations more frequently as the proportion of households owning and operating closely held businesses steadily increases each year. Rights of non-owner/manager divorcing spouses to share in the wealth created during a marriage have also been steadily expanding as shown by the number of recent rulings handed down all over the country. These rulings generally state that increased value resulting from spousal efforts (active appreciation) becomes the property of the marital partnership, while increased value attributable to other sources (passive appreciation) remains separate property.

Divorce attorneys representing a business owner are, therefore, particularly interested in clearly separating the growth in business value during the marriage between growth attributed to efforts of spouse(s) (active) and to external factors and market forces (passive).

One of the most troubling issues involving the determination of active and passive appreciation, is finding a viable "method" or "formula" for determining the portion of appreciation attributable to spousal efforts and the portion that results from third party or market forces.

Determining the share of value subject to distribution in a divorce involving an owner of a closely held business is a two-step process.

The first step is obvious and that is to determine the value of the business in question. Once the business interest has been determined, the next step is to calculate, and apportion, the change in value of this marital asset to active and passive appreciation. We do this by applying regression analysis which, in effect, isolate certain variables, and determines the influence of such variables on another independent variable (the initial value).

Multiple and linear regression analysis has been used in other industries to determine, predict, or quantify the effects of one or more variables on another unrelated variable. Because the value of a business is influenced by several variables, regression analysis is well suited for identifying and isolating, for instance, those variables that influence the marital and non-marital values.

In many cases, it may be justifiable to exclude a substantial proportion of the growth in business value during the period of marriage from the marital estate based on growth in a particular industry, period of analysis, and initial investment from non-marital resources.

An analysis of this type can be included in an overall valuation of the business, or performed separately as an analysis of the marital and non-marital share, thus serving as a supplement to an already existing business valuation.

Ashok B. Abbott is Associate Professor of Finance at West Virginia University, Morgantown, West Virginia. Professor Abbott received his M.B.A. (Finance) at Virginia Polytechnic Institute and State University (VPI&SU), Blacksburg, VA, in 1984, followed by a Ph.D. in finance, also at VPI&SU, in 1987. Dr. Abbott’s Ph.D. dissertation title was "The valuation effects of tax legislation in corporate sell-offs", and has been a court admitted expert as well in the valuation of businesses with analysis and valuation reports having been accepted by the IRS in estate settlements.

Tim Voit is a Financial Analyst and founder of Voit Econometrics Group, Inc. with offices in Naples, FL Charlotte, NC, and Milwaukee, WI. Although Mr. Voit is most well known for pension analysis & QDRO’s, Tim’s forte in the business valuation field was derived from researching stocks and the valuation of businesses for investment purposes early on. Mr. Voit has lectured in the past on business valuations for the University of Wisconsin Outreach Program titled "Financial Analysis for the Practicing Attorney" and is a graduate of the University of Wisconsin with degrees in Finance as well as Real Estate & Urban Development.