When parties separate, there are often disputes over one party’s entitlement to the other party’s shares or interest in a private or family business. If a marriage contract was executed validly, this contract may govern the splitting of business assets. Where there is no marriage contract, there is no specific method of valuating a business under the Family Law Act and parties should always be aware that different methods can result in different values with different tax consequences. Parties often hire two separate valuators and if both parties cannot agree, the issue will end up in the Family Courts.
Entitlement to a share of the business
Whilst a family business which has been inherited or gifted to one party may result in the business interest being exempted from matrimonial property, the value of a private business interest not inherited or gifted will fall presumptively into the category of matrimonial property to be split equally between spouses.
While there is an entitlement to the one half value of the business asset, this does not necessarily mean that one half of the business will be owned by your spouse. Often, settlements can be negotiated to permit the business owning spouse to retain their full business ownership with the other spouse taking the value of the business interest in another way i.e. additional funds from the bank accounts, additional equity in the matrimonial home etc. It is essential to note that the family courts do not have jurisdiction over the company’s internal management.
If a spouse held shares or an interest in a private business before the marriage, the spouse is only entitled to the increase in value since the date of marriage. For example, if the business was valued at $2 million at the date of the marriage and the business at the date of separation was $3 million, the increase in the value is $1 million and therefore the spouse is entitled to $500,000 (i.e. 50% of the increase).
If the business is created during the marriage, then the spouse will likely be entitled to a 50% split of the asset’s value, i.e. in this example the spouse would be entitled to $1.5million of the value of the business.
Methods of valuating a business
Although there is no set way to value a private or family business, there are two widely recognized methods of valuing a business. One focuses on the businesses current value and the other focuses on the businesses potential to earn future income.
One approach looks at the “liquidation value” of the business, this is where the valuator would review all of the business current assets and liabilities, at today’s value, to calculate the value that the business would realize if all of the debts and liabilities were satisfied and all assets sold to leave a cash sum which would be the “liquidation value”.
Another approach which focuses on the business’ future income looks at the “going concern” – the business’ potential earning opportunity or the value that the business may be sold for. This valuation will takes into account the assets and liabilities of the company, but also any intangible value such as patents, brand name, trade names or customer lists which may add additional value to the net value and potential earning capacity of the business. The valuator would consider a variety of factors which may include market fluctuations, the business’s goodwill and the going rate of similar companies in the market.
If each party’s expert uses a different method, the Courts will be likely to use the method which produces the higher value and that which reflects the commercial reality of the business outlook, but most importantly, the value which is fair and equitable. Often smaller, higher risk business who may struggle to find a buyer if put up for sale would be more likely to use the first approach, with larger companies which have value to others rather than just the current owner who would be more likely to find a potential buyer, would be more likely to use the “going concern” method.
Choice of valuator
Parties should be aware of who they retain as their chartered business valuator, the Courts will form a dim view and may exclude the expert evidence of a valuator if it is shown that there is a non-arm’s length relationship between the parties. This was the case in Rogers v. Rogers, 2013 ONSC 1859 where the court excluded the evidence of the valuator and refused to recognize the testimony as that of an expert witness as:
- He was a social friend of Mr. Rogers’ parents and as a result could not be described as being at arm’s length;
- He worked actively in the negotiations, resulting in a successful sale of the business in 2006. As such, the court viewed him as an “employee” of the husband’s father;
- He admitted in cross-examination, that the respondent’s father was a “fan” of his and referred business to him; and referred business to him; and
- He admitted that he was paid or compensated to prepare his report and to give testimony.
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.