Family Business Valuations and Marriage Contracts
A business owner was discussing seeking legal advice with Sandra, his high school sweetheart, about the impact his flourishing import/export corporation may face once they married.
Jacques and his business partner, Sam, started seven years ago what is today a successful international company. There are four divisions employing 38 people; each with a family of their own. The partners take several marketing trips overseas each year. Jacques often brings along Sandra extending the trip by a few days for some personal time.
Jacques essentially funnels as many household expenses and personal expenses for him and Sandra through the business as he can. Those would include the cars they both drive, their gym memberships, and any household expenses the company accountant allows in as operating expenses or consultant’s fees. Sandra is the primary beneficiary under his employment health and extended medical plan.
Sandra came to see me to understand her rights once their common law relationship becomes solemnized in marriage.
It’s All About the Value
Long before the wedding date is a good time to seriously consider whether a marriage contract is needed or desired to protect the significant assets one or both spouses are bringing into their marriage. It may seem contrary to traditional wedding vows of “…from this day forward, for better, for worse, for richer, for poorer…” to circumvent the unknown future with a precise strategy for the division of property should the marriage fail. It’s step that is never regretted if the marriage fails.
Sandra understands and agrees that Jacques’ 50% business interest which he will bring into the marriage belongs to him. But, she asks, what is the value of
- her advice as an engineer without salary,
- her contribution as a sounding board 24 / 7,
- her creation and involvement in regular focus groups to test new product ideas, and
- all the other works she does without pay?
Isn’t that effort and contribution also valuable to Jacque’s business?
A Proper Business Valuation
There is a time for the tender moments in a relationship. They are, however, not part of the negotiation of the terms of a marriage contract. Most family law matters involve money and the value of property – both the assets and the liabilities.
As we proceed in the negotiation, it is now time for Jacques to have his interest in the business valued by an accredited business valuator. Jacques’ counsel and I were able to select a chartered business valuator. Given that we were using the collaborative approach, and Sandra was very familiar with the industry and knew quite a bit about the company we all agreed that an Estimate Valuation Report was sufficient. This mid level of assurance provided a fair market value of the whole company based on a limited analysis and corroboration of relevant information. We consulted the Canadian Institute of Chartered Business Valuators Practice Standard No 110 (https://cicbv.ca/practice-standards/), the discussion paper which explains the three types of report to learn more.
Full Financial Disclosure- it’s Mandatory!
As with the negotiation of any domestic contract be it a cohabitation agreement, separation agreement, or the marriage contract as was our focus, full financial disclosure by both spouses is mandatory. And this is where we faced a hard stop.
For the marriage contract to provide that Jacques’ interest of the business be excluded from any division of property between the spouses if there was a breakdown of the marriage, we had to know its value as at the date of marriage (or a few months before). Agreeing for Sandra to share a limited interest in the value of the business prior to the marriage and a greater interest once they married, the value at the ‘start’ date was necessary.
We had pushback from the corporate accountants and from Alfred who felt the company may be compromised if Sandra were to have any future financial interest. Disclosure came to a halt.
Without full financial disclosure, negotiations could not continue, and the wedding was threatened. If Jacques and Sandra married as they intended to do, there would be no restriction on the division of property if the marriage were to fail. Jacques did his best to preserve business documents as at the date of marriage. If there was a breakdown of the marriage, Sandra would be entitled to 50% of the value of the business at the date of separation less the estimated value of the business as at the date of marriage.
- If this case study mirrors your personal circumstances, please contact Lorisa Stein directly through the Contact Page or call her at 416 596-8081 for your independent legal advice and to represent you in your domestic contract negotiations.
TAGS: Domestic Contracts, international company, household expenses, personal expenses through the business, gym memberships, company accountant, operating expenses, consultant’s fees, primary beneficiar, employment health and extended medical plan, understand her rights, common law relationship, marriage, wedding, marriage contract, protect significant assets, bringing into the marriage, traditional wedding vows, division of property, business interests, contribution as a sounding board 24 / 7, focus groups to test new product ideas, contribution valuable, negotiation of legal rights, terms of a marriage contract, value of property, assets and the liabilities, accredited business valuator, Canadian Institute of Chartered Business Valuators. Practice Standard No 110, full financial disclosure by both spouses is mandatory.