Business valuation for divorce: What couples need to know

Splitting up is never easy, especially when a business is involved. To help ensure a fair outcome, business valuation for divorce is used – not just to add up dollars and cents, but to achieve an equitable division. 

In this article, we will discuss the basics of splitting business assets in a divorce, so that couples can avoid unnecessary conflicts. In any case, consulting a family lawyer is always recommended. 

What is a business valuation for divorce? 

Canada’s family law states that business assets must be split when spouses divorce, especially if these are considered as part of the family property. Since a family business is among the assets to be divided, the spouses need to obtain a business valuation for divorce. 

Business valuation for divorce is a way to determine how much a company is worth on a given date. This helps both sides know how much they are dividing, so the process is fair and clear. 

Valuation is needed when one spouse owns a business or when the spouses establish a business after the wedding. In either case, the business or its value is considered as part of the family property that must be split between the spouses. 

This video explains how business valuations can affect a divorce, specifically under Ontario’s family law: 

 

To understand more about business valuations for divorce, you can reach out to the best family lawyers in Canada as ranked by Lexpert. 

How is business valuation done during a divorce? 

Business valuation for divorce is just one part of the overall equalization and division of family property. During a divorce, properties are divided equally and equalized if needed, according to law. 

However, if there is a valid marriage contract (also called prenuptial agreement), that contract will govern the divorce, including any business valuation. In the absence of such an agreement, the provincial and territorial family laws will apply. 

For instance, each spouse is legally entitled to half of the net family assets and its increase in value, and this includes the family business. But if there is a marriage contract or a pre-nuptial agreement, what is written there will be followed instead. 

Process of business valuation for divorce 

The law does not set a hard-and-fast rule on what should be used in a business valuation for divorce. Each case is unique, and courts, lawyers, and valuators must consider the specific circumstances of each family. At best, there are ways that are already tested by common law and by the courts when doing a business valuation. 

 Here’s an overview of the process of doing a business valuation for a divorce in Canada in no specific order: 

• agree on a valuator: either spouse can suggest a valuator, or both can jointly appoint one; if they cannot agree, the court may appoint a valuator 

• fix the method of valuation: which can either be:  

• “liquidated value” method: to liquidate the business and look at its worth at the time of the divorce  

• “going concern value” or income approach: to consider the income-earning capacity of the business 

• include the business’s increased value: whether the business is owned by a spouse before the marriage or was acquired during marriage, the increase in value during the marriage, along with the profit, must be equally divided between the spouses 

• include the business during marriage: similarly, if the business was acquired or was jointly established by the spouses during the marriage, its value must be divided equally between the spouses 

• reckoning time of the value: the business will be valued by looking at two dates:  

• the first date is the date of marriage 

• the second date can be the date of divorce, the trial date, or upon agreement by the spouses 

• the increase in value or the profit during these two dates will be divided according to law or the couple’s marriage contract 

• what is included in the valuation: both the financial and non-financial aspect of the business is valued; this includes factors such as: 

• brand, customer reach, reputation, and influence 

• different roles and contributions of each spouse  

• the employees and other labour-related issues 

In directing the process of dividing the business assets in a divorce, courts will ultimately consider the overall situation of the family and what is equitable for that case.  

Here’s a video that shows how assets, including business assets, are split during a divorce: 

 

If you need help with your divorce, you can consult one of the best family law firms in Canada as ranked by Lexpert. 

Protected assets in a divorce 

However, not all business assets are subject to valuation or division in a divorce. Under the law, these are excluded from the division of assets in a divorce: 

• a spouse's separate business, but only if it is excluded by a marriage contract or a prenuptial agreement 

• property owned by a spouse before the marriage, including gifts and inheritances received solely by that spouse 

These exclusions may vary depending on the family law of your province or territory. As such, it is advisable to consult a family lawyer in your area. 

Example of a business valuation for divorce 

Example #1: A couple owns a small family business together. If they want to file for divorce, they need to know how much the business is worth so they can split their assets fairly. Business valuation for divorce starts by picking a date to set the value. This is usually the day they decide to separate. 

A valuator and a family lawyer are then brought in to look at the company’s financial records, tax returns, and any shareholder agreements. They decide to use the “going concern value” or income approach, since it suits the couple’s situation. They could also compare the business to similar companies that have been sold or add up the assets and subtract the debts. 

Read next: From I do to I owe you: Dealing with divorce debt in Canada

Example #2: Suppose one spouse owned the business before the marriage. At the time of marriage, the business was worth $100,000. Over the years, the business grew and was worth $400,000 at the time of separation. 

Here, the original $100,000 may be excluded from the property division, but only if the spouse can show clear proof of the business’s value at the start of the marriage. This proof may include: 

• tax returns 

• old financial statements 

• past business valuations 

The $300,000 increase in value during the marriage is usually considered family property and will be divided between both spouses. The valuator will look at records from both the start and end of the marriage to figure out the increase in value of the business. If the spouse cannot provide proof of the original value, the whole business might be treated as family property and divided accordingly. 

This second example shows that only the increase in value might be shared, while the original value could be excluded if the spouse can provide proof. 

How can lawyers help in a business valuation for divorce? 

While family lawyers can work with business valuators to do the valuation, there are other aspects of the divorce that lawyers can help with that are related to the valuation: 

• explaining the applicable law: lawyers help clients understand their rights, what to expect when a business is part of the split, and how the law treats business assets 

• ensuring proper documentation: lawyers make sure that all the right documents are gathered to help the business valuator get a clear picture of the company’s worth 

• preparing and enforcing a marriage contract: before the marriage, lawyers can help the couple create their own marriage contract and enforce it when the time comes 

• helping couples settle out of court: when appropriate, lawyers can assist the couple in reaching a settlement, usually through mediation and negotiation, to resolve family issues related to their divorce 

Business valuation for divorce: making sense of business splits 

Business valuation for divorce is about more than just numbers. It ensures both sides get a fair share and, if possible, the business stays strong. 

With the right advice and clear information, couples can find a fair way to split business assets and move forward. Getting help from a valuator and a family lawyer can make the process smoother and help avoid costly mistakes. 

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