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How the Structure of Your Company Plays a Role in Valuation during Separation or Divorce

 

by Ryan Pearson

 

Being a small business owner can be complicated if you are going through a separation or divorce.  It can be difficult to value an unincorporated small business, which includes sole proprietorships, partnership interests, and professional practices.  The valuation process is sometimes more complex than valuing a small business that is incorporated.

The principle that governs all matrimonial matters is known as “disclosure”.  Whether negotiating a domestic contract or litigating a matrimonial matter before the court, it is essential that a party disclose their assets and liabilities.  A small business is no different than any other asset, and pursuant to Rule 13 of the Family Law Rules a financial statement must be “full and frank”.

This means that a proper valuation of your business will be necessary for the purposes of equalization especially if you and your former spouse decide to use the courts, both parties will need to fill out and calculate their net family property (“NFP”).

If your business was owned at the date of your marriage, its value can be deducted from your NFP. If the business still exists at the date of separation or divorce it will be valued again.  If it increased in value during the marriage, that value is divided between spouses.

However, unincorporated businesses are difficult to value, and a business valuator may need to be retained.  The court stated in Blaney v. Blaney [2012] O.J. No. 1487 at paragraph 5:

“Particularly where a party is self-employed, or is a shareholder of a company and works for that company they should know that, for support purposes, their Income Tax Returns may not be enough to establish income and that the value of their interests in a company will need to be established by the use of and need for experts in many instances. The obligation and onus to satisfy the court as to income and the value of assets and debts is on the person whose income or asset or debt is called into question…”

Many business owners hire a valuator, often a “chartered business valuator”.  A chartered business valuator is a specially qualified financial professional with a designation granted by the Canadian Institute of Chartered Business Valuators.  There is no set formula for valuing a business, it can be done many ways.  Some of the more common approaches are the “liquidation value” and the “going concern value”.

Valuators will value your business by trying to determine the fair market value.  This will include a discussion with you, the business owner.   It also includes a review of the financial records and an understanding of the business sector you are in.  Assets owned by the business may also be valued to determine their market value.

Best case scenario is that you and your partner agree on a value of your business.  If you cannot, this can be a potentially expensive point in litigation.  Whatever method you choose, cooperating with qualified valuator will help with you fulfil your obligation for full and frank disclosure.

 

If you have questions about how the value of your business impacts the settlements in a separation/divorce, please contact Ryan Pearson, Associate in the Family Law and Litigation Department of Lancaster, Brooks & Welch LLP.

He may be reached in St. Catharines at 905-641-1551.

 

 

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