What will happen to your business when you and your spouse decide to get a divorce? Getting a divorce is stressful and challenging enough on its own. Spouses must consider several aspects, such as the fair distribution of marital assets.
However, the situation can get even more complicated when one of those assets includes a family-owned business. In Canada, 40 percent of small and medium-sized enterprises (SMEs) are owned by members of the same family, many of whom are likely spouses.
Family business involvement in your divorce requires careful planning and the assistance of legal counsel. You need this particularly when you have made no legal arrangements concerning what happens to the business in the event of a divorce.
If you’re getting divorced and have a family business, here are some things you need to know.
The Legal Implications of Divorce on Your Business
In Ontario, Canada, the court treats any spouses-owned property as family property. As per the Family Law Act, property refers to any interest, present or future, vested or contingent, in real or personal property. For a business, real property may comprise factories, offices, and other buildings owned by your company.
It is irrelevant under whose name the property is and their respective use or contribution. Whether you or your spouse owned it separately or together on the date you separated, it’s considered family property.
Unless you agree otherwise, all family property, including your business, must be shared equally between spouses. The rule does not apply to excluded property, which includes the following:
- Property one spouse owned before the marriage
- Gifts and inheritances of a spouse received during the marriage
However, if the excluded property’s value increases, the increase in value is regarded as family property, meaning it should be divided evenly.
Basic Rules for Dividing Business’s Assets
Division of properties, such as business assets, is one of the legal matters couples need to address after the legal termination of a marriage. In most cases, the division is on a 50-50 basis. But when equal division is significantly unfair, the court will order an unequal division.
The following are some factors that the court may consider when deciding whether to divide property evenly or not:
- Did one spouse fail to divulge any debts or other liabilities at the date of the marriage?
- Were debts or other liabilities claimed in reduction of a spouse’s net family property incurred recklessly or to deceive the other spouse?
- What percentage of the spouse’s net family property are gifts obtained by the other spouse?
- Did the spouse intentionally or recklessly use their net family property?
- Did one spouse disproportionately incur more debts or other liabilities than the other spouse to support the family?
- Is there any written agreement between the spouses that’s not a domestic contract?
- Did one spouse borrow from family funds to acquire, maintain or improve a property?
Note that every divorce case is unique. And the rules applicable to you may also depend on your province or territory and specific circumstances. But to give you a little background, below are typical ways they can divide the business if they are part of your family property:
- You may divide the business assets between you and your spouse
- You may both decide to sell the business and split the proceeds
- One of you may buy out the interest of the other in the business
- You may choose to keep running the business together after a divorce
Business Valuation in Divorce
Regardless of the property division method used, the court needs to assess the economic value of your business. There’s no one fixed rule in determining a business’s worth, but there are two generally accepted approaches.
- Liquidation Value: This involves estimating the net amount a business could realize if it liquidates all its assets and pays off its liabilities today. The valuator calculates it by subtracting your business’s total assets and liabilities.
- Going Concern Value: Meanwhile, this evaluates not only the strict book value of a business today but also its capability to earn future income. Besides its earning capacity, it includes other factors such as the business’s outlook, intangible value, and the market price of similar companies.
Typically, the courts may use the approach that generates a higher value. They may also prefer to opt for a fair and equitable value in your business and specific circumstances. However, note that multiple interpretations are possible whatever type of method a valuator chooses.
The goal is to agree on the business valuation. The court will then use a process of equalization to determine how much will be paid to the non-owning spouse.
Another critical decision spouses must make is the method of making the payment. It may be by selling the business or liquefying marital assets and dividing the proceeds. In some cases, the paying spouse buys out the non-paying spouse.
Protect Your Family Business in Advance
In many cases, the payment obligation to the non-owning spouse can hurt the business’s ability to meet expenses. It is best to protect your family business in advance to avoid this. Below are some ways you and your spouse can keep your business safe from the detrimental effects of a divorce:
Divorce may never happen, but having a prenuptial agreement may help increase your chances of saving your business. Before your marriage, you can stipulate in the contract that any businesses you have already started and will acquire will be separate property.
Full disclosure to your fiancé regarding the agreement is necessary, and it should be in writing, signed, and notarized. Note that signing must be voluntary a few days before you marry. Otherwise, the court could declare it null and void.
A postnuptial agreement is like a prenup but done after you and your spouse gets married. Although not as strong and legally binding as a prenuptial, it’s better than nothing.
A postnup is helpful if your business accumulates considerable debt or declares bankruptcy. Just as you gain assets during a marriage, you may also acquire debts. Having a postnup in place will determine how you’ll divide such debts should the marriage end.
However, courts don’t always support postnups. If they do, it is after scrutiny. That’s why you need a family law lawyer to draw these documents for you.
This agreement commonly protects a business from situations such as one spouse dying or the company being sold. But it also includes shielding you and your business in the event of divorce. A buy-sell agreement can help you sell the property share of your business in a predetermined way without having to go to court.
Consider Other Options
As much as possible, litigation should be a last resort when divorcing with a family business involved. Unfortunately, heightened emotions can create unnecessary conflict, and going to court may seem like the only viable option. But it can result in a more costly settlement. Additionally, you and your spouse could lose control over the outcome.
While it may depend on the circumstances of your marriage, the following are some alternatives to divorce litigation that you might want to consider:
- Mediation: When considering a divorce with a family-owned business, you can resolve ownership and asset division through a mediator. A mediator facilitates negotiations to help you and your spouse develop an amicable agreement without going through expensive litigation.
- Collaborative Negotiation: In collaborative negotiation, you and your spouse will have separate lawyers representing you in a collaborative divorce outside of court. This means you will be protected and supported by your own lawyer. The failure of lawyers to negotiate an agreement in this process legally disqualifies them from representing you and your spouse in court. The purpose of this is to motivate your lawyers to work in your best interests.
- Arbitration: This alternative is a type of divorce trial. But rather than resolving your issues in a public courtroom, an arbitrator will hear you in a private setting. You and your spouse, with your lawyers, agree to hire a private judge or arbitrator. Unlike a public court trial, you can define the procedures and schedule the arbitration hearing.
Proactively Consult With a Family Law Lawyer
A business interest can make the divorce situation much more complex. There is no one-size-fits-all solution to divorcing your spouse with a family business. However, proactively consulting with one of the lawyers of Nussbaum Family Law will make the process less stressful. An experienced lawyer will help you navigate the complexities of divorce and achieve the best possible outcome.