One of the most contentious issues in divorce proceedings is the division of business assets. The first question is whether the business interest is a family asset. The second is, if it is a family asset, how it should be valued for the division of assets. The spouse seeking to keep the business in his or her allocation of assets wants the value to be low and the spouse not wishing to retain the business wants its value to be high so as to entitle him or her to a larger share of the other family assets. So the question is – how do the courts assign a value to a business? This can be especially difficult if it is a small, closely held business where the shares can not be freely transferred.
The first question is – is the company a family asset or is it an excluded business asset? Section 59 of the Family relations Act states that property owned by one spouse is not be family assets if it is proved that:
it is used for primarily a business purpose; and
the non-owning spouse has made no contribution to its acquisition or to the operation of the business.
However, the threshold for finding contribution is very low and can be met by indirect contribution, including being the primary caregiver to the children freeing up the other spouse to run the business. Hence, except in cases of very short marriages, businesses are almost always considered family assets and therefore the real issue comes in valuating it.
There are a variety of approaches used to value a business and expert evidence is generally required. However, a common approach is to apply the "Willing Seller, Willing Buyer Approach". This alleviates the problem posed by the spouse seeking to keep the business for himself or herself who will claim it has a low market value because no one else knows how to run the business, that the employees are loyal only to them, and that if the business were sold he or she could compete with it.
The "Willing Seller, Willing Buyer Approach" assumes that a willing seller would likely provide the buyer with all necessary information to successfully run the business; would encourage the good will of the employees toward the new buyer; and would likely agree not to compete with the buyer. Hence, the fair market value is determined by valuators on that basis, thereby alleviating unfairness to the spouse not retaining the business after the divorce.
Another concept which is gaining some ground, and may have a unique application to family law cases, is the "Value to Owner Approach". This contentious approach is particularly useful in cases where the financial information upon which to base a valuation is either unreliable or incomplete. The "Value to Owner Approach" was argued by Lorne MacLean and applied by Justice Drost in Boden v Boden (1991)(BCSC). The value to owner is defined as the amount that an owner might be prepared to pay in order to retain ownership of the business rather than relinquish such ownership. Hence, it is flexible and generally calculated by projecting the amount of the owner’s future earnings from the business.
