Breaking up the Family Business

February 19, 2016
Ron Shulman

Article written by Ron Shulman

Most couples who go into business together never dream their relationship will end. But when things unravel, the emotional turmoil is further complicated by the question of what happens to the family company.

The typical approach for any business partnership is to establish protocols and processes from the outset, Plamen Petkov, Vice President of Provincial Affairs (Ontario) and Business Resources for the Canadian Federation of Independent Business in Toronto, told the Financial Post in the article When Business Partners Divorce: Best Advice for Couples. “With a spouse, you are presumably working with someone you trust so you tend to overlook some of the mechanisms that should be implemented to safeguard yourself. Separation is the last thing on your minds when in the throws of starting a business,” he told FP.

It’s a complicated area of asset division when there is no pre-existing shareholder agreement. Beyond obligations to yourself and your children, there are obligations to employees, clients, suppliers, creditors, distributors and other business shareholders (if any). You may have to change banking arrangements and signing authority. One side may refuse to buy or sell shares just to annoy the other. And if you can’t agree on how to run the business during your divorce, it can quickly become directionless and stagnant. If the environment becomes toxic while you duke it out with your ex, you may lose good employees who don’t want to be stuck in the middle or who fear for their long-term job security.

And, of course, you’ve made a personal emotional investment in growing your business – if you’re shut out, you may feel like you’re losing your identity as well as your marriage and livelihood.

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Properly dividing a family business will require a valuation. This process usually includes a careful examination of financial records, verification of any expenses the family has run through the company, cash flow and future profitability. The valuation will be required regardless of whether you will each retain shares in the company, one of you intends to buy out the other, or if you intend to sell the business and split the proceeds.

The valuation must be conducted by an independent expert (one is often appointed by the court in these cases) who is given complete transparency into the company’s financial affairs.

Navigating this type of situation can be emotionally and financially draining. You will need the advice of both corporate and family legal professionals — the corporate lawyers to untangle the business side, and the family lawyers to untangle the relationship side and help you reach a fair agreement on property division. Your family lawyer will also help you to understand your rights and obligations, as well as provide guidance on the separation of personal and business affairs.