Divorcing business partners urged to hire a valuator

Divorcing couples with a family company should consider hiring a business valuator to accurately determine the value of their enterprise, Calgary and Vancouver family lawyer Marcus Sixta tells AdvocateDaily.com.

“I'd recommend working with a business valuator because it's going to give the best idea of value, aside from actually selling the business,” says Sixta, founder of Crossroads Law.

Having your firm assessed by a business valuator is not a legal requirement, but doing so will inject a degree of certainty into a process that can be open to interpretation and disputes, he says.

Some divorcing couples can’t afford a valuation, which can cost between $5,000 and $100,000, depending on the size and complexity of the business, Sixta says. Sometimes, the company is too small to warrant the expense.

“In cases where the business has or seems to have value, and where the parties can afford to conduct a business valuation, it is something that is highly recommended,” he says. “Otherwise, it's purely guesswork by whoever is on the file, whether it's the lawyers involved, the judge, the arbitrator, or the parties themselves."

Leaving a business valuation to non-financial professionals is a poor use of money because they lack the required expertise, Sixta says.

Valuation is not an exact science, and there are different ways of determining a company's worth, Innovation, Science and Economic Development Canada states on its website.

“Each of these methods is based on different assumptions and financial information, which typically results in a different value for each method,” says the federal department.

Disputes can arise in a number of areas, including the current value of the assets, earning capacity, future growth prospects, and intangibles such as business goodwill.

“You run into a situation that's often called the battle of the experts where each party brings their own valuator to court, and it can get very expensive,” Sixta says.

Some provinces have specific rules governing business valuations, he says.

In Alberta, typically each party will engage their own separate valuator or hire one jointly, saving money by splitting the cost, Sixta says. “It's much better for everybody if you can just agree to jointly hire somebody with a background that everybody agrees is appropriate for the business,” he says.

However, one of the parties may still disagree with the results. “They may challenge it by hiring their own expert after the fact, or they may hire somebody to critique the business valuation,” Sixta says.

Under family law, a business started during a marriage is considered matrimonial property, and must be divided 50-50 upon divorce regardless of how much each spouse contributed to its operations, he says.

If the business predates the relationship, the parties must determine how much it increased in value while they were together, and equitably divide that amount, Sixta says.

“It can be quite emotional for people who have been heavily invested in developing a business for a long time, and then face the proposition of either having to sell the company, or find the adequate funds to pay their spouse out,” he says.

Alternatively, they may try to carve off a piece of the business by giving shares to one of the spouses.

Or they can enter a “butterfly transaction” — moving part of the business into a holding company owned by one of the spouses.

Splitting the business can be complicated if there are other business partners, Sixta says. “There may be concerns about giving shares to an ex-spouse, especially if they're voting shares.”

It’s important to hire a valuator with proven competence. Ask your lawyer or financial professional for recommendations. Check around and research them online, he says.

Some are accredited by the Canadian Institute of Chartered Business Valuators. Some specialize in valuations for family law.

“The bottom line is if you have a family company, you should probably get a business valuator,” Sixta says.

Article first posted on March 21st, 2019 - AdvocateDaily.com