Saving family businesses from divorce during COVID-19

Why previous norms around income predictions and business valuations no longer exist, resulting in more complex family disputes

Saving family businesses from divorce during COVID-19

The pandemic has already taken a toll on both the economy and marriages across the country, and now with a second wave, those numbers are likely to rise. In fact, one in seven small businesses are at risk of going under as a result of COVID-19.

Previous norms around income predictions and business valuations no longer exist, resulting in more complex family disputes. Particularly for family-owned businesses, reducing the negative impact of divorce on the family itself, staff and the day-to-day operations is critical.

First steps can impact the outcome on family and business

A family business is both an asset and source of income – sometimes for more than one family generation. But upon separation, people can sometimes bring it harm, whether deliberately or inadvertently.

While it’s important for couples to seek legal advice quickly, the type of lawyer that is chosen can impact the outcome – for better or worse. A client who chooses an aggressive family law litigator right from the beginning will usually see their separating spouse do the same. This usually fuels conflict and higher costs, which can impact the stability of the business and everyone’s well-being.

As early as possible in the separation process, best practice is to recommend spouses each hire a collaborative lawyer, or one mediator for the family. Some professionals have experience dealing with transition and exit plans. A collaborative law or mediation process will help the family to develop a plan around who continues to work in the business or how roles will change, and how to make property and support payments that take into account the business’ cash flow and development needs.

Generally, unless the shares were excluded in a marriage agreement, family law in Canada allows married spouses to receive the equivalent of half the value of the business portion that was acquired during the marriage. This may be a considerable amount that could cripple the operations of the business. Working together, the couple can be guided on how to make this payment with other liquid assets rather than with the transfer of shares in the business to provide a clean break, and, if necessary, the buy-out of can be made in installments over a period of time to minimize financial stress on the business.

The business owner may find him/herself spending a large amount of time on the legal process, to the detriment of the company. Going to court requires showing up for hearings, being questioned under oath, and attending to several accounting and legal meetings. It also takes control out of the owner’s hands because the judge will make decisions that will impact the couple, the family and the business forever. A court may involve itself into a business if deemed necessary. Judge have the power to order share transfers, a forced sale of the business and, in some cases, issue freezing orders. If necessary, the business account can also be halted, which could prove catastrophic. Once in court, personal and sensitive family disputes, including business information, will become public record.

As it is, the court system typically moves very slow and the pandemic has only worsened the situation. Advisors can help mitigate the negative impact by working with mediators or collaborative lawyers, whose methods result in lower fees and less time spent reaching an agreement, giving spouses more control during already difficult times.

How to best approach joint finances
Separations are often more successful when both spouses work together to build a vision for their newly separated lives. However, there is often confusion about how to de-couple finances and advisors are best positioned to provide guidance and promote a respectful approach.

In general, it is best that couples not unilaterally rush into separating the finances; emptying joint accounts and cutting off credit cards is not only irresponsible but can also cause irreparable harm. These tactics can be seen as antagonistic, leading the other spouse to respond with equally hostile and unfair moves, starting a downward spiral that keeps families in conflict for years.

Untangling joint accounts, including where a spouse’s pay should be deposited post-separation, and who pays what expenses is a delicate topic. It is best that advisors recommend spouses continue to fund joint accounts and make all regular family payments in the same manner as before separating until arriving at a longer-term arrangement.

When it comes to life and health insurance, spouses should not change or remove their beneficiary designations without first obtaining legal advice, particularly since most separation agreements and court orders provide for continuation of life insurance.

Separating couples can also choose to work together with one valuator to evaluate the business and provide information about income– in the right type of situation. This neutral third-party can bring their expertise in a balanced way, saving the family the cost and aggravation of each spouse retaining their own expert, which can lead to additional arguments, time and expense.

Separating is confusing enough; it is more so during this pandemic. Now more than ever, separating families are encouraged to minimize acrimony and try to set aside their anger towards each other and try to work together for everyone’s sake.

Nathalie Boutet, based in Toronto, is an experienced family law lawyer, accredited mediator and certified Family Enterprise Advisor, skilled at providing unique strategies and out-of-court results to the complex legal, financial and human matters related to separation or divorce for high-net-worth families and business owners. Contact Nathalie by email.