Marital separations are difficult.
Business owners facing a marital separation often have an added layer of concern over the impact of the separation on their business. Next to the matrimonial home and perhaps personal investments, businesses are often the most valuable asset one or both spouses may own. Business interests may have been passed down from generation to generation and established over many years of hard work. Whether one spouse or both spouses have an interest in a business, the parties must make decisions about what will happen to their business after the separation.
How to Decide What Happens Next
To make the best decisions for their particular situation, spouses need to know the value of their business interests and the options available to either wind up or continue their business after the separation.
A fundamental principal of Family Law is that both parties should make full and frank financial disclosure to one another when they separate. In Ontario, the Family Law Act requires that at the date of separation, parties are to identify and value their assets, which includes business interests, in order to determine an equitable division of marital property and ensure they each receive an equal benefit from the property accumulated during their marriage. This process is known as the equalization of net family property.
Determining the Value of a Business
The most fundamental first step in dealing with a business interest upon separation is determining the value of the business. Some business owners may have a good idea of the value of their business for sale or tax purposes. However, that value may be very different than the value for family law purposes. To obtain an accurate value for family law purposes, family law lawyers often recommend obtaining a business valuation report from a Chartered Business Valuator (CBV). A CBV is a highly qualified professional, often an accountant, who is specifically educated and trained to value public and private businesses by quantifying their profitability, tangible and intangible assets and future cash flows. Some CBVs also have education and training regarding valuing businesses in the context of a matrimonial separation.
The legislature and Family Courts recognize the importance of providing for an ‘orderly and equitable settlement’ of marital affairs, which may include taking a more broad and all-encompassing approach to the standard of value applied with complex assets such as businesses.
There are different ways to determine the value of business interests depending largely upon the purpose of the valuation. In the family law context, it is important that the value used reflects more than just the amount the business may be sold for on the date of separation. Fair market value is defined by the Canada Revenue Agency as the ‘highest dollar value that you can get for your property in an open market from an informed and willing buyer and an informed and willing seller who are dealing at arm’s length with each other.’. Fair market value may or may not reflect the most “fair” value from a family law perspective. More broadly, a fair value for family law purposes is a determination of value that is just and equitable, taking into consideration factors such as intrinsic value, value to the owner, liquidation value, fair market value, prospective value, the nature of the property, the status of economic markets, triggering events and the expectation of spouses during the marriage.
The Impact of COVID-19
In the current climate of economic volatility in light of the COVID-19 pandemic, these other factors may be highly important, and it may be difficult to obtain comparable market data or determine accurate market conditions currently. It is now even more crucial that business owners obtain a business valuation report from a reputable and reliable Chartered Business Valuator. A business valuation report has benefits that go beyond simply providing a value of your business. The report can provide a business owner with information about where assets may be liquidated while minimizing the impact on overall business operations or value, and advise on how to draw funds out of the business, perhaps to make an equalization payment to a spouse, while still maintaining a viable operation. A proper valuation report provides a business owner with the best chance of protecting the success of their business moving forward post-separation.
Current family law recognizes the importance of maintaining the operational viability of a business after a marital separation. Under certain circumstances, business owners may be able to avoid financial hardship that would otherwise cripple a business by allowing a large equalization payment to be made over a period of up to ten years. An accurate business valuation report may provide a business owner with information to help them determine what type of payment plan is realistic or preferred for the ongoing success of the business.
It is only when the nuances and complexities of each individual company are valued appropriately, that the viability of the business may be fully protected moving forward post-separation.