Divorce and Your Business: How to Protect What You’ve Built
If you own a business and are going through a separation or divorce, it’s natural to feel especially concerned. You may be wondering about what will happen to the venture you’ve spent years – or perhaps decades – building.
For many business owners, their company is more than just an asset – it represents their identity, their livelihood, and their source of future income. But the good news is that Ontario Family Law has a structured approach to dealing with business interests. With the right information and guidance, you may be able to both protect your business, and optimize your financial stability.
Your Business and the Equalization Process
In Ontario, the starting point after your separation will be the equalization of your and your Ex’s respective Net Family Property (NFP), as required under the Family Law Act. This follows a legislated formula that takes several factors into account.
As it concerns your business, the outcome will depend on your unique facts. Generally speaking:
- If you built the business together with your Ex, then its value will usually be split as part of the equalization process.
- If you already owned the business coming into the relationship, then the increase in value that accrued during your marriage will be taken into account in your respective NFPs.
- If you built the business alone during your relationship, then it will form part of your NFP and be equalized just like your other assets.
Regardless of the scenario, the exercise begins with the court assessing your business’ current value, so that it may factor it into a fair resolution of your and your Ex’s property claims against each other.
Income and Support Considerations
Property claims are not the only point where your business will come up in your divorce. It can also be a factor in your possible support obligations to your Ex. This is because Canadian law views your business not merely as an asset, but also as a source of income when it comes to determining how much child or spousal support you might need to pay.
As part of this exercise, the courts look at all your income sources – which if you’re a business owner, may not be limited to salary alone. It might include retained earnings, dividends, stock options, and other corporate benefits that collectively factor into your available income for NFP equalization purposes.
Joint Family Ventures
If you owned and ran a business during the marriage while your Ex cared for the family and matrimonial home, then you’ll also want to know about a legal concept known as a Joint Family Venture (JFV). This is where a court decides, based on equitable grounds, that your arrangement was actually an equal venture with your Ex and – now that you’ve split up – it’s one that results in a financial unfairness or professional detriment to him or her. By formally declaring the existence of a JFV, the court remedies that inequity.
An example of this is an Ontario case called Halliwell v. Halliwell, 2017 ONCA 349. After doing a valuation on the husband’s business extensive interests, the court ordered him to pay $3 million to the wife by way of an equalization payment. Respecting spousal support, it confirmed the husband and wife were equal partners, with him pursuing his thriving business and the wife managing the home. This amounted to a highly successful Joint Family Venture, and the wife was entitled to share in the business’ success even after the marriage was over, not just through equalization but also through support. After an appeal she was awarded about $20,000 a month, going forward.
Equalizing NFP Does Not Always Mean Selling Your Business
If you own a business and are going through a separation or divorce, you will no doubt worry about whether you’ll be forced to sell the business as part of that process. In reality, this is uncommon under Canadian law.
More often, as the business-owning spouse you will likely be able to keep the company, but will have to compensate your Ex through an NFP equalization payment, as determined by the court. Better still, this payment can sometimes be satisfied using other assets, structured payments, or financing arrangements.
How Businesses are Valued
A key theme so far is that the value of your business will have to be ascertained. This is one of the most important steps in your divorce, and it can be a complex exercise. It should typically be carried out by a Chartered Business Valuator or other financial expert.
The valuation may consider factors such as:
- Your company’s assets and liabilities
- Its historical earnings and projected future income
- Any goodwill (including brand reputation and customer relationships)
- Existing shareholder or partnership agreements.
Your Ex is also entitled to obtain independent expert valuations, based on the forthright business information that you are required by law to supply. The court will then compare these to reach a final assessment.
Disclosure is Essential
Needless to say, the proper valuation of your business will required the full disclosure of its assets, operations, and finances. The fairness of your entire divorce process hinges on it.
Not surprisingly, your failure to disclose is never a good idea: It can not only jeopardize your legal position, it can land you in hot water. with the court.
This was illustrated in Fatahi-Ghandehari v. Wilson, 2017 ONSC 6034 where the husband owned an exotic car rental business. During his divorce proceedings he repeatedly failed to comply with the court’s order to provide complete financial disclosure to his wife – including his tax returns, banking and PayPal records, tracing information, and a full business valuation. Even worse, the information he did provide was inconsistent, and revealed that he had been making improper transfers of exotic cars to various family members – all in an effort to thwart his wife’s ability to get a fair equalization of the assets.
After concluding the husband had deliberately withheld or obscured information, the court found him in contempt and imposed a sanction.
Planning Ahead Can Make a Difference
If you are a business owner, then either before or during your marriage there are several steps you can take, to reduce any uncertainty about what happens if you split.
In particular:
- Domestic contracts (such as marriage contracts or cohabitation agreements) can set out how your business will be treated if your relationship ends.
- Shareholder agreements can also contain provisions that address Family Law issues, such as restrictions on share transfers or valuation methods.
Naturally these should be negotiated only with the help of an experienced lawyer, with input from your accounting professional and perhaps a valuator.
Practical Tips for Business Owners
If you have a business and are facing separation or divorce, consider the following:
- Get early legal and financial advice so you understand your exposure and options
- Gather complete financial records, including corporate statements and tax returns
- Review any shareholder agreement, partnership agreement, or buy-sell arrangement
- Avoid making major business changes without legal and financial advice, as this can complicate your valuation for your separation or divorce
- Think about long-term cash flow, not just the immediate settlement
Every situation is different, and the way a business is treated will depend on its structure, value, and the broader financial picture of your marriage. If you need help navigating this complex area, give our offices a call or request a Free Consultation.