If one or both spouses own a business, or owned one at the date of marriage, that business will need to be valuated. If a business was owned at the date of marriage, its date of marriage value can be deducted from that spouse’s net family property. In order to do so, that spouse will have to indicate the value of the business at the date of marriage. If the business was still in existence at the date of separation or divorce, it will have to be valuated again. This is because if the business increased in value during the marriage, that profit will be divided between the couple like any other asset. If the business was acquired during the marriage, its value will be similarly shared between the spouses, and this will require a valuation. (For more information on how property is divided, see our article: Equalization and How it Is Calculated.)
As you may already be aware, there are many ways to value a business, and each of those methods can result in quite different values. If you own your own business, or your spouse does, it is important that you consider how the business should be valuated. You will want to hire your own valuator, and, if you and your spouse cannot agree on a value to assign the business, and you end up litigating the issue in court, you will want to call your valuator as a witness and have him or her testify on the valuation method used, and why.
How Is the Value of a Business Determined?
There is no set way, either as set out in the Family Law Act or as stated by the courts, to determine the value of a business. But there are two general approaches to finding the value of a business. The first focuses on what the business is worth right now, while the second looks to its capacity to earn income in the future.
One example of the first method is to find what is referred to as “liquidation value,” which estimates how much money a business could realize if all its assets were sold off today to satisfy its creditors. This takes the value of all assets (at their current value), and subtracts all debts or liabilities.
In the forward-looking approach to valuation, a valuator would look at a business’s future earning potential, or what a person might pay to own that business. One common approach is called the “going concern value.” It takes into account not just the strict book value of a business (assets minus liabilities), but what a purchaser might pay over and above that value, for example as a result of some intangible value the business has, such as its brand name. There can be many different ways to estimate the going concern value, but courts often take into account factors including the current book value, the business’s economic outlook, goodwill (intangible value), earning capacity, and market price of similar companies.
Given the choice between two methods, such as liquidation value or going concern value, courts have said they will use whichever of the two produces the higher value. The court will also prefer a method of valuation that reflects the reality of what will happen to the business. For example, if a business is to be liquidated to satisfy debt arising from or predating marriage breakdown, then the liquidation method will make most sense. The liquidation method has also been stated to be the preferred method for small, owner-operated, high risk businesses—in other words, businesses that would be unlikely to find a purchaser, and that have little value outside the current owner’s hands. But for companies that are worth more in the future than a tally of their assets and liabilities will reflect, a going concern method is more appropriate.
Assigning a Fair & Equitable Value to Your Business
Regardless of which type of method a valuator chooses, the numbers are open to manipulation and varying interpretations. The courts will attempt to choose the value that seems fair and equitable in the circumstances. It is important, if you and your spouse are arguing this issue in court, to provide extensive evidence to support each step in your chosen method of valuation. This information will be set out in the valuator’s report if one has been engaged to value the business.
We also recommend involving a lawyer who has experience in business valuation and property disputes. Your lawyer can ensure your case is properly presented and your interests protected through these complex proceedings. At Feldstein Family Law Group P.C., we have been serving clients across Ontario since 1994. We have the skill and resources necessary to handle these and all other divorce or separation-related matters.
Call (905) 581-7222 to discuss your case with an Ontario divorce lawyer at our firm.