How To Divide A Family Owned Business in a Divorce?
Splitting the family owned business in a divorce can bring a new set of challenges to an already complex situation.
The value of all assets are included in the equalization of net family property on separation and this includes all business interests you may own on date of separation. There are circumstances that may allow a reduction in the value of the business to be equalized.
The ability to exclude the value of a business from equalization of property with your spouse is limited. One way to exclude the business’ value is to have a valid and binding domestic contract in place prior to the separation which sets out that the business is excluded from equalization.
Can I Keep My Business?
If you alone own the business, you are entitled to keep the business even if you owe your spouse an equalization payment. However, the value of the business is included in the equalization of net family property, which means that your spouse will share in the value of the business.
If on the other hand you owe your spouse equalization and are unable or unwilling to satisfy the equalization payment with assets outside of your business, you may have to encumber or sell the business to make the equalization payment to your spouse.
Do I Need A Business Valuation?
Most businesses require a valuation by a Chartered Business Valuator (CBV). Financial statements and other reports from the business’ Chartered Accountant are usually not enough to reliably establish the value of the business. There are risks to both spouses associated with using a value derived from information in the absence of a valuation report from a CBV. In such instances you must assess whether it is worth the risk of not having a formal valuation done.
Do I Have To Disclose If Third Party Partners/Shareholders Are Involved?
If third party partners and shareholders are involved in your business, the nature, manner and extent of disclosure may be tailored to the specific situation. However, you will have to provide enough disclosure to accurately assess the value of your interest.
Are Minority Shareholder Discounts Taken From The Value?
A minority discount may be applied to reduce the overall value of your interest in a business if the value of your interest is affected by the fact that others have true control of the business.
Will My Family Business Be Affected?
Every part of your life, including your family business, will be affected in some way by the separation. It is critical that good legal advice be sought early. The advice should address your substantive rights and obligations as a spouse and how they will impact your family business, as well as procedural options for resolution of the issues. You may want to consider using the dispute resolution processes available as Alternatives to Court to ensure that you maintain control over decision making in relation to your assets and your income instead of handing the decision making power over to a judge or an arbitrator. If the latter becomes necessary, it is wise, whenever possible, to reach an agreement with your spouse that will narrow the issue(s) that an adjudicator must make a decision on.
Will The Family Business I Inherited Be Affected?
Inheritances that still exist in your name on date of separation or that can be traced from other assets/businesses may be excluded from equalization of net family property. Income from the inheritance/business is NOT excluded unless the donor’s Last Will and Testament or the Deed of Gift expressly provide that it should be excluded from your net family property.
It is important to preserve all relevant documents over the years to establish and protect your right to exclude a business.
A consultation with your Family Law lawyer when receiving an inheritance will assist in preserving the exclusion of your family money from equalization in the event of a separation from your spouse. This consultation is most effective when done before the inheritance is received but can and should be done as soon as possible.
Bortolussi Family Law is located in Vaughan, Ontario and serves the Greater Toronto Area including Woodbridge, Concord, Maple, Kleinburg, Thornhill, Vaughan, Markham, Richmond Hill, Brampton, Bolton, Nobleton, Newmarket, Oxford, Orangeville, Aurora, North York, Etobicoke, Caledon, Whitchurch-Stouffville, King City, Schomberg, Mississauga, Oakville, Streetsville and Toronto.