COVID-19: the struggling business fuels the already struggling marriage

After more than three months of life during COVID, many family lawyers in Canada expect that there will be a spike in divorce filings once the court systems reopen. Data from Italy and China support the trend. But absent the data, this expectation seems fairly intuitive; after all, if a relationship is already on shaky ground to begin with, the various forms of stress associated with COVID would seem unlikely to improve the situation.

What does this mean for a struggling marriage in which one (or both) spouse(s) own a business? COVID has dealt major financial and emotional blows to business owners which would only exacerbate a marriage that is already on the rocks. Let’s look at the case of Sylvia and Eric.

Sylvia and Eric were married six years ago in 2014. Eric just celebrated his 40th birthday and Sylvia is turning 38 in the fall. They have one daughter. Eric worked at his family’s restaurant supply distribution business since he was young and took a majority ownership of the business, along with management responsibilities, ten years ago, after his father passed away. Sylvia has remained at home with their daughter but has also assisted with certain administrative work for the business from home.

Running a business while married had always been a challenge, and Sylvia and Eric’s marriage was already in the stages of unravelling by early 2019. A year later, during the early days of the COVID crisis, orders from restaurants began to dry up. Cash balances began to shrink. The financial pressure intensified the already evident strains in their marriage. After some of their restaurant customers started to resume orders to accommodate revamped takeout operations, it seemed like the business could survive – but it was clear that Eric and Sylvia’s marriage could not. Eric moved out of the matrimonial home.

As they make their decisions on what to do next, Sylvia and Eric want to proceed with civility and fairness. They each retain independent legal advice and their respective lawyers inform them of the process moving forward. From their lawyers, they learn that there are special considerations to be made regarding the family business.

Valuation issues

For the purpose of calculating net family property, spouses must measure the value of any business interests owned at both the date of marriage and the date of separation.

Accordingly, Eric’s ownership interest in the business will need to be valued as of the date of their marriage in 2014. Eric’s ownership interest in the business will need to be valued again at the date of their separation. Both valuations – at two different points in time – will be necessary for Eric and Sylvia to reach an agreement on asset/property division.

Both Eric’s and Sylvia’s lawyers advise them to retain a Chartered Business Valuator (CBV) to provide analysis of the business valuation issues and those relating to Eric’s income support (as described below). The CBV is the most widely recognized designation by the Canadian court system in assessing business valuation and income issues in a divorce settlement. The CBV works independently and objectively – free of bias toward or against either spouse.

Eric’s income for support purposes

In order to determine any child and spousal support payments, both Eric and Sylvia will need to calculate their income in accordance with the Federal Child Support Guidelines.

Sylvia’s income under the Guidelines is relatively straightforward: she receives a small salary from the family business.

For the purpose of establishing support levels, Eric’s income is a more complicated subject. Since Eric controls the business, he has been able to use various tax planning tools to structure the form of his compensation from the company. He uses a combination of salaries and dividends, but in the company’s good years, he has not historically withdrawn as much from the company as was theoretically possible. (In retrospect, this helped the business weather the COVID storm.)

Under the Guidelines, the court may consider all or part of the pre-tax corporate income from the business that was deemed to be “available” in prior years. Given that the business had ongoing working capital needs and capital expenditures, the amount of corporate income deemed “available” (if any) can be a subjective assessment, and one which requires analysis by a financial expert.

Disclaimer: The author of this article is not a lawyer and the contents of this article are for informational purposes only. Nothing in this article should be interpreted as legal advice and all readers are reminded to seek independent legal advice.

The common denominator of business valuation theory and fighting COVID-19

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