In a three part series I will explore the options available to divorcing couples who have family businesses.
Industry Canada’s definition of “small business” is firms that have fewer than 100 employees. Ninety-eight percent of businesses in Canada have fewer than 100 employees according to their Key Small Business Statistics report issued July 2012. This does not include sole proprietorships and self-employed individuals. With divorce rates hovering around 50% the likelihood that a divorce will impact small business owners and sole proprietors is very high.
The business could probably be the biggest and most illiquid asset subject to division under Family Law in Ontario. It has likely been the sole financial means of spousal and child support of the divorcing couple and their children. If it is a legacy family business it could also mean the livelihood of other family members. Deciding what to do with the family business will have long term financial implications not only to the divorcing couple but everyone involved with the business.
What are the Options?
Given that the parties are divorcing there are four options to consider:
1. Close the business down
2. Transition or sell the business to a new business owner
3. Give the business to one spouse
4. Continue to own and run the business together
Close the Business Down
This is not usually a viable option unless the parties are in retirement and have had a more passive involvement in the business or are close to retirement. In either case if there was value in the business continuing without them, a better option may be to sell the business. Getting something would be better than nothing.
Sometimes anger and resentment between the divorcing couple is so intense that the business owner would rather see the business fold than share any value or future earnings from the business with the ex-spouse. Divorce lawyers should counsel their clients that the Family Law Act has provisions whereby values and future income is imputed upon the business owner if it was determined that they willfully destroyed an asset or willfully underemployed themselves in order to reduce obligations for support. I have had business owners attempt to use business closure as emotional leverage in order to reduce the value of the business. In the worst case if forced, sale or bankruptcy may result if parties are unable to agree to terms.
But more often this option is not exercised because the business is the only viable means of support for the family in the near and long term and as such there is a desire by both to continue operating the business.
Transition or Sell Business to New Owner
As many business valuators and business brokers will tell you, it takes careful planning and considerable time to properly market and sell a business as a going concern and to find a qualified buyer. Unless the couple had considered this years before, the decision to divorce comes first before the decision to sell does.
Parties are motivated to settle matrimonial matters quickly versus having them drag on especially in the legal system. If selling was an option, a deal would have to be in place in order for a final value to be attributed to the business in a settlement agreement. This would mean a divorce settlement would not conclude until the business was sold.
Sadly, potential buyers will soon discover that the motivation to sell is being spurred by a divorce and would be looking for a bargain. Continued conflict between the parties may negatively impact business operations and customers and employees may drift away because of the uncertainty around the viability of the business further eroding its value.
The greatest chance of success in this option may be to transition to existing key managers within the business. However, the ability to finance the sale or the willingness for the key owner to remain for a transition period may not make this viable either.
Next time I will discuss keeping the business – who stays and who goes.
Mary Krauel, Senior Negotiator/Mediator – PRM Mediation – www.PRMmediation.com
Divorce, Corporate, and Elder Care Issues – Serving Southwestern Ontario from Mississauga and London.