Divorce is not inevitable but it is also not improbable. According to Statistics Canada, approximately 38% of all marriages end in divorce. Many matrimonial divorces involve a family business that is the major source of funds/lifestyle for the family. The business can be put at risk if the divorce becomes highly contested and contentious. Depletion of financial resources combined with distractions and lack of focus/effort on the owner’s part can result in a forced sale or liquidation of the business.
Here are five things to consider to ensure the family business survives a matrimonial divorce:
Consider the Collaborative Separation Process
Collaborative family law is an alternative dispute resolution process that allows couples who have decided to separate or end their marriage to work with collaborative professionals (e.g. lawyers, family and financial professionals) to avoid the uncertain outcome of court and achieve a settlement that best meets the specific needs of both parties and their children without the threat of litigation.
Agree on Business Value in Advance
In a matrimonial separation, the family assets (net of liabilities) must be valued as at the date of marriage (DOM) and as at the date of separation (DOS). The increase in net value over the course of the marriage must be divided equally on separation. The tool used to map out this increase is referred to as the Net Family Property (NFP) statement.
Disagreement over the value of the family business/businesses can derail the separation process, causing significant delays, increased costs and considerable stress. Agreeing on the value of the family business (at both DOM and DOS) in advance of a potential separation will help streamline the separation process and preserve resources including the family business.
Understand the Basics of Income for Support Purposes (Matrimonial)
Support payments (child and/or spousal) in Canada are determined based on each spouse’s income as calculated in accordance with the Federal Child Support Guidelines.
Business owners must realize that their income will be converted to a gross, employment income equivalent. It is critical for business owners to understand this because it means that the various perks and benefits of business ownership (e.g. dividend compensation, income splitting, personal expenses paid by the business, etc.) can lead to an unusually high, notional income level. It is also very possible that all or a portion of the company’s pre-tax income will be added to the business owner’s income (to the extent that it was otherwise available for distribution).
Organize Your Financial Records
It is imperative to keep all financial records for the business well organized and up to date. This includes the company’s annual financial statements, tax returns, detailed general ledgers, bank and credit card statements, etc.
Documentation to support the value of each spouse’s assets and liabilities (including the family business) must be disclosed. This is required in a traditional litigation setting as well as the collaborative process. Significant time and effort will be required if these documents are not maintained in an organized fashion.
Consult an Independent Chartered Business Valuator
A Chartered Business Valuator (CBV) can help provide an independent perspective on the value of the family business. If done on a regular basis as part of the annual financial reporting process this will help minimize the potential for disagreement over the value of the business in the event of a matrimonial breakdown. The cost of the annual valuation serves as insurance towards preventing the potential loss of time, money and effort that will be spent on lawyers and experts if there is a matrimonial separation and you and your spouse do not agree on the value of the business.
Getting an independent business valuation as part of your annual financial reporting will help protect your family business (and you) in the event of a matrimonial or shareholder dispute. Get in touch with our professionals at VSP to learn more.