When parties separate, tensions are high with both parties making lifestyle adjustments, attempting to divide assets and often negotiating parenting arrangements. In the case where parties share business interests or are partners in business, this can lead to increased stress, where the business and therefore the spouses current and future financial security remains entwined with a soon to be ex-spouse’s.
In the case of Danecker v. Danecker, 2013 ONSC 1605, the husband and wife were both physiotherapists. Their marriage ultimately broke down in late 2009 and at the date of separation, they were equal partners in an unincorporated physiotherapy clinic. The husband attempted, without success, to set up his own separate clinic but eventually was employed by a local hospital. Upon the separation, the wife bought out the husband’s share of the building and continued to operate for three years without any profits being shared with the husband.
As part of the divorce process, the husband engaged a business valuator who (in absence of a balance sheet) placed a value of $443,000 on the business’ goodwill. In contrast, the wife, without a valuator, valued the business at $175,000 and offered three options to her husband: using the value of $175,000, either she would buy him out for his one half share, he could buy her out for her one half share, or if neither accepted a buy-out then the business would be placed on the market for sale. Given the significant differences in the proposed valuations the court was “perplexed” as to why the wife did not retain an independent valuator. The court commented on the potential strategic nature of this choice stating “Part of the reason is, perhaps, the wife’s argument that the court cannot compel her to buy out the husband’s interest if she disagrees with its value and the property should ultimately be put on the market for sale.” The court accepted the methodology used by the husband’s valuator but averaged the proposed valuations of each spouse, ultimately concluding the value to be $309,000.
The court found that as the wife had operated the business for three years without the oversight of the husband who retained a 50% interest; if a sale were ordered, the husband was entitled to an accounting and share of the profits from the last three years. The court concluded “It is inappropriate and unjust to simply deal with this as one might deal with a matrimonial home or other similar property where the parties cannot agree with respect to the joint asset. In those circumstances, such as a matrimonial home, it is clear that the court would simply order that asset listed for sale on the open market and the proceeds divided equally.” Ordering a sale would simply draw out any litigation and increase costs with the court recognizing the need for finality for both parties. The court concluded that the wife owed the husband an equalization payment of $154,500 (representing one half of the $309,000 value of the business).
Although the business was unincorporated, the court lacked the jurisdiction to compel the wife to purchase her husband’s interest in the business, the court stated that the wife may choose to sell the business to pay the equalization payment now owing to the husband.
It is important to highlight the following key takeaways:
- Even where one party no longer participates or is actively involved in the business, this does not remove their right to an accounting and share of the profits.
- Where a jointly owned assets value is disputed, if the parties are prepared to agree upon current value of the assets and the means of effecting the equalization payment, including transfer of property, the court can give effect to such an agreement. Failing any such agreement, however, the court should order the sale of all jointly owned property in order to ensure that fair market value is obtained. It is important therefore to engage the services of an experienced valuator who can propose different valuation methodologies and tax consequences. See our previous blog on “How are business assets valued and split?” for more information.
How can we assist?
Our experienced family lawyer can assist parties seeking a separation, divorce or is concerned how business assets and family property will be split. We can also assist with any urgent family law motions. At Gilbertson Davis LLP, we advise and represent clients on a full range of family law matters. Contact us for a consultation with our experienced family law counsel.