How to Value a Business in an Ontario Separation

If you or your spouse owns a private company or a professional practice, the business is often the largest and hardest asset to deal with on separation. It is not usually sold, yet its value can drive a large equalization payment.

This article explains how a business fits into the Ontario equalization framework and what you can do to prepare. Questions such as who pays for a valuation and which discounts apply depend heavily on the facts, so they are best confirmed with a lawyer and a qualified valuator.

A business is property under the Family Law Act

Net family property is the value of all property a spouse owns on the valuation date, less excluded property, less debts, and less the net value of property owned on the date of marriage (other than a matrimonial home). Property is defined broadly as any interest, present or future, vested or contingent, in real or personal property.

Shares in a private corporation, an interest in a partnership or a practice you own fall within that broad wording. Equalization then compares the two spouses' totals, and the spouse with the lower total is entitled to one-half the difference. It is a payment of money, not a split of each asset. That is why the non-owner spouse generally does not become a co-owner of the business.

The date that fixes the value

The valuation date is the earliest of several dates, including the date of separation with no reasonable prospect of resuming cohabitation and the date a divorce is granted. Values are calculated as of close of business on that date.

This matters because a business can change quickly. A client contract won after separation or a bad year after it does not change the valuation date. Records from around that date, such as year-end financial statements, are therefore important.

If the business was owned on the date of marriage, its net value on that date is generally deducted, so only growth during the marriage is shared. The person claiming a deduction has to prove it. A valuation as of the date of marriage may therefore be needed as well.

Debts, negative values and the home exception

Debts and other liabilities on the valuation date, such as lines of credit, loans and mortgages, are deducted. For a business owner, this can include personal guarantees and shareholder loans, but how each one is treated depends on the facts.

If a spouse's net family property is less than zero, it is deemed to be zero. The other spouse does not take on the shortfall.

Business and home are sometimes tied together. The matrimonial home is counted in full even if it was owned before the marriage. If property that includes a matrimonial home is normally used for a non-residential purpose, only the part reasonably needed for the use and enjoyment of the residence is the matrimonial home.

Valuation method, discounts and costs

The statute defines what is counted and when, but it does not set out a formula for valuing a private company. How a particular business is valued, including whether any discounts apply, depends on the facts of that business, so it is worth confirming with a lawyer and a qualified valuator. Treat any rule of thumb you hear with caution.

The same is true of who pays for a valuation and who chooses the valuator. How that applies depends on your situation, so it is worth confirming with a lawyer.

• Ask what valuation date and what standard of value the valuator is using.
• Ask whether the valuator is retained jointly or by one side.
• Ask how debts, shareholder loans and personal income are treated.
• Ask what documents the valuator needs and by when.

Disclosure, protection and paying the result

A party making a property claim in court must serve and file a financial statement in Form 13.1. Before a settlement conference or trial, each party must serve and file a net family property statement in Form 13B, and must correct documents once they find them to be incorrect.

If you fear assets may be moved, the court may make orders to protect a claim, such as restraining dealings with property or requiring security. The court may also make an order restraining the depletion of a spouse's property that would impair or defeat a claim. If spouses are still living together and there is a serious danger that one may improvidently deplete their net family property, the other spouse may apply to have the net family properties equalized as if they were separated.

On payment, a court may order payment, security including a charge on property, or payment in instalments or delayed payment for up to ten years if necessary to avoid hardship. This helps when most of the wealth is tied up in the business.

What to do next

• Gather several years of corporate financial statements and tax returns.
• Collect shareholder agreements, articles and any buy-sell documents.
• Note the date of marriage and the date of separation.
• List business debts, guarantees and shareholder loans.
• Speak with a family lawyer and an accountant before choosing a valuator.

Frequently asked questions