Saving the family business

COVID-19 has made shepherding a family business through a divorce even trickier, but there are a few things advisors can do to make the process smoother, writes Nathalie Boutet

Saving the family business

The pandemic has already taken a toll on both the economy and marriages across the country. One in seven small businesses is at risk of going under as a result of COVID-19 – and those numbers are likely to rise. In addition, previous norms around income prediction and business valuations no longer exist, resulting in more complex disputes. Particularly for family-owned businesses, reducing the negative impact of divorce on the family itself, as well as the company’s staff and day-to-day operations, is critical.

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

Instead, as early as possible in the separation process, spouses should each hire a collaborative lawyer or a single mediator for the family. 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, as well as how to make property and support payments that take into account the business’s 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 can be a considerable amount that could cripple the operations of the business. 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. If necessary, the buyout can be made in installments over a period of time to minimize financial stress on the business.

The business owner might find him/herself spending a large amount of time on the legal process, to the detriment of the company. Going to court also takes control out of the owner’s hands because a judge will make decisions that will impact the couple, the family and the business forever. A court might also involve itself in 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. The business account can also be halted, which could prove catastrophic.

The court system typically moves very slowly, 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.

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.

Untangling joint accounts, including where a spouse’s pay should be deposited post-separation and who pays what expenses, is a delicate topic. Advisors should recommend that spouses continue to fund joint accounts and make all regular family payments 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 with one valuator to evaluate the business and provide information about income. This neutral third party can bring expertise in a balanced way, saving the cost and aggravation of each spouse retaining their own expert, which can lead to additional arguments, time and expense.

Separating is confusing during normal times; it is even 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 work together for everyone’s sake.

Nathalie Boutet is an experienced family lawyer, accredited mediator and certified Family Enterprise Advisor, skilled at providing unique strategies and out-of-court results related to separation or divorce for high-net-worth families and business owners.