When couples in Canada go through a divorce, dividing business assets can become a complex affair. These assets are almost always considered part of the marital property, meaning both spouses may have a claim through the Family Law Act or as a co-owner.
Navigating how a business is treated upon marriage breakdown requires careful consideration and what’s most recommended is hiring an experienced divorce lawyer. Seeking advice early in the process is the best case scenario to finding the most effective solution.
A Business as Marital Property
As a general rule, a business that exists on the date of separation is property that divorcing spouses will need to deal with. The big question is “how”?
- Do both spouses own the business?
- Does one spouse want to keep operating the business, while the other spouse wants out?
- Are there any other owners? How do they factor into the equation?
- What if the business is in massive amounts of debt?
- What if there’s a mortgage on the matrimonial home tied to the business?
- What if only one spouse “owns” the business, but the other spouse has a claim to a beneficial interest?
- How much is the business worth?
Business Valuation Methods
One of the most challenging questions for parties is “how much is the business worth”?
As lawyers, we rely on business valuators to provide us with calculations of value for a business.
There are various methods used to determine the value of a business, and the method used by different business valuators depends in large part on the nature of the business.
- The income-based approach projects future earnings based on past performance, which suits businesses with stable income streams.
- The asset approach calculates the value by subtracting liabilities from assets. This includes tangible items like property and equipment.
- Lastly, the market-based approach compares the business to similar businesses that have been sold recently. Each method has pros and cons depending on the business type and situation.
Selecting a Valuation Expert
Choosing a qualified expert can make a significant difference in the valuation process. A business appraiser with experience in marital disputes can provide an unbiased assessment. It’s important to select someone with relevant certifications and a strong track record. Engaging an expert who understands the local market conditions is also beneficial. Their knowledge ensures that all aspects of the business are accurately represented in the valuation.
Additionally, if you’re in court and having a battle about the business, a business valuator who has appeared in court before, particularly if they’ve been qualified as an expert witness, can be very beneficial to confirming that they know what they’re doing and can defend it in court.
Common Strategies for Handling Business Assets in Divorce
- Buy-out:
- This involves one spouse purchasing the other’s interest in the business. This requires an accurate business valuation to determine the fair market value.
- Valuation can be complex, involving both tangible and intangible assets. It’s crucial to consider liabilities, which may impact the final valuation figure. Professional appraisers or accountants can be hired for this purpose.
- After valuation, the buying spouse may need to arrange financing, which sometimes involves assets outside the business. Discussing tax implications before finalizing any buyout is essential to avoid future issues.
- Ongoing co-ownership
- Distributing shares is an option where both spouses retain ownership, though this may complicate decision-making.
- Establishing clear terms on how shares are divided can help manage potential conflicts. If a shareholders agreement doesn’t already exist, if divorcing spouses are going to continue to operate the business together, a shareholders agreement should be a necessary part of the business continuing, tangential to the separation agreement.
Frequently Asked Questions
Does owning a limited company shield business assets from being subject to division in a divorce?
Owning a limited company does not automatically protect business assets from being factored into the property equalization. The spouse who owns the limited company is required to disclose its existence, the extent of the spouse’s ownership interest, and the value attributable to that interest.
How is a business that was started prior to marriage treated in the event of a divorce?
If business started before marriage and was maintained or grew during the marriage, its increased value will factor into the equalization.
What are the legal considerations for protecting a business from division in the case of a divorce in Ontario?
Business owners can protect their interests through prenuptial or postnuptial agreements.
