Welcome to the Tailor Law Podcast, where we break down complex legal topics to help you make informed decisions about your family and your future. I’m your host, and today we’re exploring a critical subject for many separating couples in Ontario: how business valuations affect divorce cases.
Divorce can be a complicated and emotional process, especially when one or both spouses own a business. Understanding how businesses are valued and how that valuation impacts property division is essential for ensuring a fair settlement. Today, we’ll unpack what business valuations are, why they matter in divorce proceedings, and how they influence asset division in Ontario.
So, let’s begin.
First, let’s talk about what a business valuation is. At its core, a business valuation is the process of determining the economic value of a business or business interest. In the context of divorce, this valuation is crucial because it directly impacts how property is divided between spouses. In Ontario, the Family Law Act requires the equalization of net family property, meaning that all assets and liabilities accumulated during the marriage must be valued and divided fairly.
For business owners, this means that their company—whether it’s a small operation or a large enterprise—must be assigned a dollar value. But how is that value determined?
Business valuations typically consider several factors. One of the primary distinctions made is between personal goodwill and commercial goodwill. Personal goodwill is tied directly to the business owner’s reputation, skills, and relationships. It isn’t transferable and can’t be sold. Commercial goodwill, on the other hand, is associated with the business itself—its brand, client base, and systems—and can be sold or transferred.
For example, consider a self-employed contractor with no employees and no physical assets beyond a van and some tools. In this case, much of the business’s value is likely personal goodwill. Without the owner actively working, the business generates no income. This contrasts with a dental practice that has multiple staff, a solid client base, and a well-known location. That business has significant commercial goodwill that can be sold to another dentist.
Understanding this distinction is important because only commercial goodwill is typically considered divisible in a divorce. Personal goodwill generally isn’t.
But how do experts determine the value of a business? In Ontario, a Chartered Business Valuator, or CBV, is often hired to conduct this assessment. A CBV is a professional trained to analyze financial information and market conditions to arrive at a fair market value. There are several methods they might use, including the income approach, the asset-based approach, and the market approach.
The income approach focuses on the business’s future earning potential, considering its revenues and expenses. The asset-based approach looks at the company’s tangible and intangible assets minus its liabilities. The market approach compares the business to similar businesses that have been sold.
Each method has its place, and a CBV will choose the most appropriate one based on the nature of the business. For example, an operating business with steady income might be best evaluated using the income approach, whereas a holding company owning real estate might be better assessed using the asset-based approach.
Another key point is the date of valuation. In Ontario, the valuation date is usually the date of separation, but it can also include the date of marriage for determining deductions and other key financial milestones. This is important because business values can fluctuate significantly over time. Economic conditions, industry trends, and even global events like the COVID-19 pandemic can impact a business’s value.
COVID-19, in particular, posed challenges for business valuations. Some businesses thrived during the pandemic, while others struggled or even closed. Valuators had to carefully assess whether financial performance during this period was an anomaly or part of a longer-term trend. This often required multiple valuation methods and scenario analyses to arrive at a fair value.
Now, let’s talk about common challenges and risks associated with business valuations in divorce. One frequent issue is inadequate disclosure. For a CBV to accurately assess a business’s value, they need full access to financial records, contracts, and other key documents. Incomplete or inaccurate disclosure can lead to disputes and potentially costly litigation.
Another challenge is dealing with unreported income or personal expenses run through the business. Some business owners may underreport income or overstate expenses to minimize taxes. In a divorce, this can complicate the valuation process. A skilled CBV will look for red flags, such as unusually high expense claims or discrepancies in reported income, to ensure the valuation is as accurate as possible.
Income diversion is another concern. This occurs when a business owner manipulates income to reduce their reported earnings—perhaps by delaying invoicing or shifting income to a new partner. Identifying and adjusting for these tactics is critical to achieving a fair valuation.
Legal professionals often face the question of whether to accept a business owner’s valuation or seek an independent assessment. In most cases, hiring a CBV provides a more reliable, objective valuation, which can stand up to scrutiny in court or during negotiations. It’s an investment that can prevent costly disputes and ensure a fair outcome.
The costs of a business valuation can vary depending on the complexity of the business and the type of report required. In Ontario, a basic calculation report might cost between $5,000 and $7,000, while a comprehensive valuation could cost more. However, this upfront cost can save significant time and legal expenses by providing clarity and preventing prolonged disputes.
Sometimes, both spouses may hire separate valuators, leading to conflicting reports. In these cases, the court may encourage the valuators to engage in what’s called “hot-tubbing.” This process involves both experts collaborating to identify and narrow down the issues they disagree on. By working together, they can present a more streamlined, unified analysis to the court, saving time and reducing costs.
Ultimately, the goal is to reach a fair and equitable division of assets. For business owners, that means understanding how their business will be valued and being prepared to provide full and accurate disclosure. For spouses of business owners, it means understanding your rights and ensuring you’re getting a fair share of the marital property.
At Tailor Law, we understand the complexities of dividing business assets during divorce. Our team works closely with financial experts to protect your interests and help you navigate this challenging process. If you’re facing a divorce and need guidance on how your business or your spouse’s business will be valued and divided, we’re here to help.
Visit TailorLaw.com to schedule a consultation with one of our experienced family law lawyers. We can provide you with the legal advice and support you need to move forward with confidence.
Thank you for joining me on this episode of the Tailor Law Podcast. I hope you found this discussion helpful and informative. Be sure to subscribe so you don’t miss our upcoming episodes where we continue to explore important topics in family and divorce law.
Until next time, take care.