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An agreement on what happens to a company if a couple has to divide marital property can be put in place at any time. (Thinkstock/Thinkstock)
An agreement on what happens to a company if a couple has to divide marital property can be put in place at any time. (Thinkstock/Thinkstock)

Valuation

Divorces mess up firms as much as families Add to ...

For more than 20 years, Carol was an equal partner with her husband in a family business, a restaurant franchise with outlets across western Canada.

While they had incorporated with an agreement on how to equally split profits, what they hadn’t discussed – let alone agreed to in writing – was a plan for what would happen to the business partnership if their marriage failed.

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When they broke up a few years ago, Carol – who asked that her real name not be used – assumed they could carry on business as they always had. Instead, she found herself increasingly marginalized as deals were made by her ex-partner without consulting her. She was eventually barred from entering the office in Calgary. “I’ve ended up being cut out of a business that is as important to me as a child I helped raise,” she explains.

It’s an almost universal lament in divorces by partners in small businesses who were life partners as well, says Wendy Olson-Brodeur, founder of The Financial Divorce Specialist Inc., based in Calgary.

“Eighty per cent of small businesses in Canada don’t have any partnership agreement and even those that do almost never cover divorce of the partners,” she says. “I’ve found people think divorce can never happen to them. But it can.”

According to Statistics Canada, more than 40 per cent of marriages end up in divorce. “Whenever I meet a small-business owner my first question is: ‘have you thought of this, because after a divorce it’s always too little and too late,’” Ms. Olson-Brodeur says.

And it’s not just something that should be done when you first get married or start a business. An agreement on what happens to a company if a couple has to divide marital property can be put in place at any time, she adds. “Ideally, that would be done before a marriage is obviously breaking down: you need to do that while you’re in a good working relationship,” Ms. Olson-Brodeur says.

Partnership agreements should be reviewed and valuations should be updated every two to three years, she advises. That’s particularly important as companies grow and have other shareholders. “Recently I had a case where a husband and wife had a business that kept expanding and then took on another couple as partners, so each had a quarter share. It became three against one and they transferred the company’s assets to a new company excluding the wife. And there was nothing she could do about it.”

The situation could have been headed off in a pre-divorce shareholder agreement that covers buying and selling provisions, including valuation methods, how the partners could sell their shares to each other, and whether they can offer them to a third party, says Jeff Levy, managing partner with Porco Levy Zavet LLP in Toronto, which specializes in small business incorporation.

“It’s like insurance. Otherwise you can have a battle in a divorce over the valuation of the company and who runs it. That can end up having the settlement drag on for years, and drag the company down with it.”

A common family business scenario involves one of the spouses starting the business and the other is a shareholder. “If it’s understood at the time they set up a business that one of the spouses is going to be participating more than the other and would want to take over the business after a divorce, it needs to be in writing,” Mr. Levy says.

The most common family business is one in which the wife is a partner who does much of the administrative work, such as the bookkeeping and scheduling, and the husband does more of the hands-on work – dealing with clients and managing employees, says divorce lawyer Carol Hickman of the Quay Law Centre in New Westminster, B.C.

After a divorce, the wife, who was likely being well remunerated for what she was doing, is unlikely to be able to find work that would reach the same level of income, she adds.

“It’s typically the husband who would try to do a buyout, so not only are they losing their marriage, the wife would lose her identity. Some of my female clients have worked in a family business for many years and now they’re on the outside looking in,” Ms. Hickman says.

But women are increasingly the primary entrepreneurs, who may involve their husbands as a partner only after they’ve set up the business.

Carol says she believes her dispute has stalled the growth of the company and she wants to sell her share of the assets, but negotiations are dragging on because it’s unclear who now owns what. “I never in my wildest dreams could have imagined this could happen.

“In hindsight it would have been so much easier to have an agreement from the beginning about running or dividing the business if we divorced. It could have avoided years of uncertainty.”

Many younger women are starting out with their own entrepreneurial businesses, or in professional practices in law or dentistry, before they get married, Ms. Hickman says. And there are more women starting businesses in their 50s, after leaving another career or once the kids are on their own.

According to statistics from Royal Bank of Canada, four out of five new businesses are started by women and 47 per cent of small and medium-sized businesses in Canada have at least one female owner. That means there are more than 820,000 female entrepreneurs and almost 80 per cent are married.

“It can be a real catch-22 for a lot of women because they don’t tend to think about the prospect of a divorce when they start a business,” Ms. Hickman says.

“I’ve had a few where the fight went on so long it ended up with the court having to appoint a receiver,” she adds. A good course of action in a protracted dispute is to get the feuding partners to agree to bring in someone else to run the business. Otherwise, “it can drive clients to go somewhere else and can ruin the business.”

Business partners also have to consider how a split would affect others, says Abby Kassar, vice-president of high-net-worth planning for RBC Wealth Management in Toronto. “Shareholder agreements often only deal with what happens if a shareholder wants to leave the business or sell their shares, but other factors are how to deal with the day-to-day operations so they aren’t affected.”

If both members of the couple are dealing with customers and employees they should have a comprehensive agreement that includes a strategy for how responsibilities and roles would be divided if they want to continue running the company after a personal split, Ms. Kassar explains. That would include clauses about managing employees and who will deal with bankers, customers and suppliers.

Ms. Olson-Brodeur has seen several clients lose companies due to divorce, and she’s incorporated her law practice so she is the sole shareholder. Even though she has left her husband the company in her will, his name doesn’t appear on the firm’s articles of incorporation.

“If he were my bookkeeper, or otherwise involved, the most I’d give him is 49 per cent,” she adds. “If it’s truly your business, keep majority ownership,” she advises.

These arrangements shouldn’t be viewed as a threat that a marriage faces the risk of a breakup, says Heather Whitten, partner in business law with Wilson Vukelich LLP in Toronto.

“Just because it’s a family doesn’t mean that you shouldn’t have a business agreement that covers potential scenarios, even if they seem unlikely. You can write in provisions that only take effect if there is a triggering event, like a separation,” Ms. Whitten says.

She is finding that partners setting up family businesses are becoming more willing to enter into detailed shareholder agreements in case of separation. Ms. Whitten says they’re being prodded not only by lawyers, but also by accountants, “who have seen how dire the results of having no shareholder agreement can be.”

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