How to Value a Business During Divorce, for Equalization Purposes
What happens if one of the spouses is a business owner? How do you split a business? It is the clear intention of the law that Judges are supposed to avoid making a Court Order that would result in the sale of an operating business to pay an equalization payment, unless there is no reasonable alternative.
The Court therefore, may order that one spouse pay the other a share of the profits from the business, or order that one spouse transfer, or have the corporation issue to the other spouse, shares in the corporation. Thus, profits that would ordinarily be retained in the partnership to meet working capital requirements may have to be paid out to the spouse of a partner, and shareholders may have to share their voting and other power with an unwanted spouse.
A good shareholder agreement should require that a shareholder be bought out in the event that their spouse makes a claim for an equalization payment under the Act. In this way, the separated shareholder would receive funds to help satisfy the spouse’s claim in exchange for shares in the business, and the remaining shareholders could continue operating the business free of interruption by the non-shareholding spouse. However, that type of agreement would have been negotiated by the shareholders at the inception of the business, and not the end of a marriage.
The Family Law Act can also be triggered when one spouse dies but had a Will leaving the other spouse out as a beneficiary. The Act allows the surviving spouse to trigger (fake with the approval of the law) a marriage breakdown/separation the day before their spouse’s death, ensuring that the surviving spouse receives no less than an equal sharing of their combined net worth. However, the surviving spouse can also opt to receive under the Will (if it is more favourable to them) or an intestacy (where there is no Will) if that is more favourable. But there is a short time limitation involved so the need to consult with a lawyer is urgent.
The parties to a marriage are free to exclude the operation of the Family Law Act by entering into a marriage contract or prenuptial agreement. For example, to prevent a spouse from becoming entitled to a share of the profits of a partnership, or from becoming a shareholder in a corporation, all the partners or shareholders should sign marriage contracts in which their spouses have agreed to forego such rights. Visit Cohabitation Agreements, Marriage Contracts and, Prenuptial Agreements to learn more.