In last week’s BVWire, we mentioned that Dr. Ashok Abbott (West Virginia University) has developed an online application that produces a passive appreciation factor on a national level for businesses in the retail sector. The application is live and available for testing purposes if you click here. Feedback is welcome!

How it works: The application embodies Dr. Abbott’s methodology from his peer-reviewed paper (click here), which identifies and then tests likely factors for their ability to impact the outcome for the business (causality). The factors that qualify as causal factors are then assessed for their economic impact (elasticity). To use the application, just choose the type of retail business and enter the beginning and end dates for the valuation. The result is a passive growth factor on a national level for that industry group for the time period selected.

For example, let’s say a car dealership is caught up in a divorce in a jurisdiction where passive appreciation is not marital property. The couple was married January 2000 and divorced December 2020 (valuation date). In the application, select those start and end dates and then select “New Car Dealers.” The results show that the impact of the relevant market factors produces a passive growth factor of 30.56%, so about a third of the increase in value for that type of business during that time period would be passive appreciation.

Note that these results are for the entire industry using nationwide data, so it gives an overall starting point that can be used in settlement negotiations. If need be, the results could be fine-tuned down to the county level using demographic data in the public domain. These local data should be used alongside observed revenues and free cash flows from the subject firm to make a specific estimate for that business. Further analyses should be done that identify spousal efforts that would separate any additional passive appreciation.

Dr. Abbott’s paper has the full details on his methodology and its inner workings. The analysis can be done by hand, but the calculator eliminates the heavy lifting.