Lori L. Aylwin – Associate, Family Law.
When a separation occurs and there is a Family Business, the separation can have a significant impact on the health and ultimate future of that business. Often a non-owner spouse may have misconceptions about the value of a business, particularly where the business does not have significant hard assets such as a law practice, a consulting business, or a private medical practice. Finding the value can be a difficult, controversial, and expensive issue. On separation focus often shifts from day to day management of the business to determining value of the business, forensic analysis regarding the validity of expenses that the family has historically run through the business, and determining what actual income can be derived from the business. This shift in focus can have a negative impact on business operations, and can cause additional economic stress on separation. In order to avoid common problems that arise on separation, and to protect a business, the following are some precautions that may be taken:
- Marriage Contracts: are the single most effective tool to reduce or avoid the negative impact of a divorce on the business. Having an agreement signed by the business owner and his or her non-owner spouse is the best protection against future problems should the couple separate. The Marriage Contract should contain a waiver by the non-owner spouse of the owner spouse’s interest in the business, whether it is owned prior to marriage, or whether it is anticipated that one spouse will take over the family business in the future. You want to ensure that the waiver also includes a specific waiver of any increase in value of the business in the future. When negotiating the Marriage Contract the business owner must provide full financial disclosure to the non-owner spouse regarding the business’ present value and its future value if known and each party must also have independent legal advice. Full financial disclosure and independent legal advice for both parties assists in protecting the agreement from attack if there is a separation.
- Succession Planning: If you are looking at transferring a family business to a child or another family member, or if you are likely to receive a share in a family business during marriage, agreements should be in place between spouses before a transfer occurs. It is wise to consider making a transfer of the ownership interest contingent on the signing of an acknowledge by the non-owner spouse stating that that the transfer of the ownership interest is a gift or inheritance which shall be excluded from the family’s net family property in the event of a separation. Further, you will want a waiver by the non-owner spouse of any future claim for an increase in value on that interest over the course of the marriage. The non-owner spouse must have independent legal advice when the acknowledgement and waiver are signed.
- Business Valuations: If you do not have a Marriage Contract or a Waiver obtained on transfer of a business interest during marriage, be prepared to have your business valued on separation. Engage someone early in the process to determine the business’ value. If possible, agree on a jointly retained valuator to avoid conflicting expert reports on the value of business. The expert retained should be a certified business valuator and should have experience in dealing with the valuation of businesses for the purpose of division of matrimonial property. In order to assist in the valuation, you will be required to provide the valuator with detailed information regarding the company including financial records. If you have a bookkeeper for the company, they would likely be the best person to assist the valuator and provide necessary information and records.
- Management and Communication: Separation can be highly stressful; focusing on your business may be difficult. Angry spouses can come into the business and cause significant disruption. Upon separation, give your staff as much information as possible (and that you are comfortable sharing) regarding your separation. It is best to take proactive steps rather than reactive steps in order to keep your business running. Advise staff if there is significant conflict between yourself and your spouse and make a plan regarding how to deal with the non-owner spouse coming onto your premises. If possible, abdicate some of your responsibilities to other owners or a manger while you weather the storm.