Boutet Family Law & Mediation, Toronto
Executives and business owners are accustomed to running the show but an upheaval in their personal life, such as divorce, can have a significant toll on their work, their employees and the business performance as a whole.
For high net-worth individuals with established businesses, the financial situation for both spouses can be complicated, with more at stake. But a rapidly growing startup can be equally problematic as valuations can turn into a moving target.
However, perhaps the most challenging situation, in terms of both its personal and financial implications, is when spouses are also business partners – where the exit of one can have a major impact on operations.
Ideally, spouses proactively prepare themselves upfront through marriage and shareholder agreements, in order to protect the business should divorce, or even unexpected death, occur. But while divorce is never easy, there are other ways to minimize the negative impact on both the individuals involved and their business.
For example, recent research from the Canadian Research Institute for Law and the Family (CRILF) shows that couples who avoid the courts and opt for alternative legal processes such as collaborative law and mediation benefit from shorter average timelines and lower legal fees over litigation. When comparing the various processes (collaboration, mediation, arbitration and litigation), collaboration was the most cost-effective ($6,269 on average for low-conflict disputes), coming in at about half the cost of litigation at $12,395. A similar gap holds true for high-conflict disputes, where the estimated average collaboration costs were $25,110 compared with $54,390 for litigation.
Whatever the choice of process, there is no way to avoid the social and emotional toll of a failed marriage. Going through a separation often demands hours of a person’s time as the couple work through everything from valuating net worth to custody disputes.
Those stress levels can often have a serious trickle-down effect on employees. The stakes are often higher when both spouses are partners in the business, given that divorce typically leads to the departure of a key individual.
To add insult to injury, the business owner may not be believed by the non-owner spouse if she or he attributes a decline in revenues, around the time of the separation, to business valuations based on historical data that may no longer be achievable. And the more mistrust between the spouses, the more financial details will need to be produced to fend off accusations of manipulating financial records.
If the matter ends up in court, the couple’s personal affairs and business financial statements become public records. In addition, they may end up spending more to obtain business valuations if there is no trust between the parties because the non-owner spouse will often question the validity or integrity of the business valuation commissioned by the business owner.
A well-managed collaborative process can provide faster results and privacy. Financial statements and the agreement reached by the couple remain private.
Another advantage is that a collaborative process uses Harvard’s “interest-based negotiation” as opposed to other processes that use positional bargaining. In collaborative negotiations, the couple are encouraged to select a neutral financial adviser who will perform the valuations on behalf of the team in an unbiased manner, saving the couple the stress and cost of multiple valuations.
A spouse who is disillusioned with the process can encourage the other spouse to try another one. While this may involve getting new collaborative lawyers who will need to get up to speed, cost savings could be achieved when both spouses work with a neutral business valuator they both agree on.
The collaborative process is gaining in popularity such that the federal government’s recent proposed amendments to the Divorce Act include an obligation on the part of family law lawyers to advise their clients of collaborative negotiations.
The faster the family can get through this process and re-establish their personal lives, the faster people can get back to more normal productivity levels.
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