How You Can Protect Your Family Business During a Divorce
Think divorce and family business don’t go together? Think again.
Although you never want to think of your marriage ending in divorce, you should be prepared for it “on paper,” simply to protect your business interests.
Most people don’t do this, and that’s a mistake. As expert Wendy Olson-Brodeur, founder of The Financial Divorce Specialist, Incorporated in Calgary, says, “80% of small businesses in Canada don’t have a partnership agreement, and even those that do almost never cover divorce of the partners.”
“I found people think divorce can never happen to them. But it can.”
With 40% of marriages in Canada ending in divorce today, it’s not a small risk – although this doesn’t mean that setting up such an agreement shows that you “expect” your marriage to fail. Rather, it’s to be seen as “insurance” against any negative ramifications that could happen as a result of divorce.
Is there a way to protect your family business during a divorce so that your interests are kept safe? Absolutely.
Even if divorce is not now a consideration and you think it won’t be, you should still protect yourself in the event divorce and family business cross paths.
Contract Before Marriage
If you already own your business and are not yet married, you can set up a marriage contract prior to getting married and establish some ground rules. You can put just about anything you want in the marriage contract, subject only to what the parties on both sides agree to.
For example, you can:
- Prevent your future spouse from making an “equalization payment” demand against your business
- Exclude business interests from established family property
- Establish shareholder or partnership agreements
This should be done even if you think divorce and family business will never go together. It’s simply a good idea to make sure everyone is protected.
Shareholder or partnership agreements can prevent one spouse from gaining primary interest in a family business if divorce happens. For example, you could set it up so that should divorce happen, any shares in the business can only be transferred to other partners. This is useful because if any shareholder gets divorced, the divorcing spouse of the shareholder will have difficulty – or find it impossible – to gain shares in the company and thus a company interest.
You can also protect against divorce and family business interests by setting it up so that if any shareholder should get divorced, he or she must make his/her shares available to other shareholders at a predetermined price. This has the added benefit of valuing the shares and may prevent company financial information disclosure to a spouse during divorce.
Freeze Net Family Property
You can freeze your company shareholding at its current value; should divorce happen, you won’t have to pay your spouse 50% of the increase in the company’s value from the date of the freeze.
Buy Shares With Excluded Property
If you purchase your business shares with excluded property, especially if it’s a startup, you can keep the value of the shares separate from net family property.
Give Options to Those Without Ownership Interest in Your Business
In similar fashion to a partnership or shareholder agreement, you can give the option to purchase shares to someone who DOESN’T have an ownership interest in your business, such as your children.
Divorce may never happen, but you should protect your family business interests regardless. Contact Galbraith Family Law to establish these protections for yourself, your partners – and your family – today.