Save the Business, Even if you Can't Save the Marriage
Toronto Star – – Thursday, May 11, 2006
Prenups aren't romantic and they raise tough issues.
But an agreement can soften the blow in a divorce.
There have been examples of couples whose marriages have failed but who were able to swallow enough rancour after their divorce to remain business partners.
It is possible - indeed, some have even prospered.
"These are very level-headed, pragmatic people and they don't come around very often," says Aron Pervin, owner of Toronto-based Pervin Family Business Advisors Inc.
The divorce rate is nearing 50 per cent, and most small business owners shouldn't assume their business would fare so well in the event of a marriage dissolution, even if their spouse isn't actively involved in day-to-day operations, he cautions.
"When both husband and wife are working in the business, it doesn't matter who started it, because now they have a higher level of investment in it," says Pervin.
"Some people get divorced and remain in the business. Some people get divorced and the business becomes the battleground. Those are the two extremes."
Some questions to consider:
- If your soon-to-be-ex-spouse is your business partner, how will decisions get made while glaring at each other across the boardroom table?
- If you can't work together, can the business be saved without requiring the sale of the operation and splitting the proceeds 50-50, as dictated by the Family Law Act?
- If one spouse leaves the business, what's to stop that ex-partner from taking the client list and setting up a competing shop across the street?
- What if your spouse seeks a court order to have the business accounts frozen, pending 50-50 equalization of assets attained during the marriage under the Ontario Family Law Act?
- What if your spouse is on your company's payroll? Can you "fire" your spouse without incurring a vicious wrongful dismissal lawsuit?
- If your spouse has helped out with your business over the years without pay, what if he or she seeks an ownership stake in the business?
Without a marriage contract that states otherwise, the Ontario Family Law Act provides for the 50-50 equalization of all assets grown during the marriage. If there are not enough other family assets, a small business owner may need to refinance or even sell the business in order to make the equalization payment to a former spouse.
"When you own a small business, you should give consideration to doing a prenuptial agreement," advises Daniel Me-lamed, a family law lawyer with the Yonge St. law firm Torkin Manes Cohen and Arbus. "Not necessarily to not allow the new spouse to have the benefits of that (business) at the end of the relationship, but at least to en-sure (the business) will be able to continue to operate should there be a separation."
A prenuptial or marriage con-tract may set out the ownership of the business and establish the division of assets at the end of the marriage, as well as any other conditions deemed necessary. "For example, a prenuptial agreement or a marriage con-tract may include terms that prohibit the non-owning spouse from being able to stop the business from operating during a separation or from targeting that asset in a separation so that it disrupts things," Melamed says.
If you have business partners, you should also consider whether they have a marriage contract, says Melamed. "Let's just say you're in a small business and you've got a couple of partners that are not your spouse. You should definitely look at the question of a shareholders' agreement and providing maybe that each partner has a marriage contract so that you can protect the integrity of your business from your partner's separation."
Another critical planning document would be a shareholders' agreement that establishes the ownership of the company and sets out a valuation process and an agreed-upon process for al-lowing partners to buy each other out if the relationship breaks down.
A security agreement is often used to protect the interests of both partners during any buy-out period, if it happens over an extended period of time. Another structure for reducing friction is to break the business into operating and holding companies so that partners have separate responsibilities.
"When people go into business, we always tell them to do a shareholders' agreement," Me-lamed says. "A lot of people are penny wise and pound foolish, because they say, `I can't afford a few thousand dollars to do that agreement.' But if you don't, if the business gets complicated because of the relationship between those business partners, you have to have a way to unwind it. And that's what a shareholder's agreement in part is about - how you operate, how it gets unwound if there are problems, how you go about solving problems."
"If the business gets complicated because of the relationship ... you have to have a way to unwind it."
Aron Pervin, family business adviser
While many engaged couples are loathe to introduce the unromantic subject of a prenuptial agreement, it can save a lot of grief and expensive litigation that "can easily cost tens of thousands of dollars" by setting out the ground rules for separation at the outset, he says.
Still, prenuptial agreements are almost always very difficult to negotiate, says Melamed, who is currently working on five.
"Any breakdown in marriage is tremendously complicated emotionally and in negotiating these things up front they are also very complicated emotionally. `You don't trust me.' 'Are you really in it for the money?' Those kinds of questions are common and it's understandable, but good planning can make for an easier resolution if there is a separation."
While many spouses and common-law partners help out with small businesses without monetary compensation, particularly during the early days, owners may want to be aware this may, in some unique circumstances, entitle them to an ownership stake in the business if the marriage breaks down.
"There's a concept in law called a constructive trust, which really is a gross oversimplification, which provides that if someone contributes to property, in this case a business, and did not get compensated appropriately for it, they may - and it's very important to emphasize the may - be entitled to make some claim as to an ownership right even though that's not the intention of the owner," ex-plains Melamed.
"I think that you want to be compensating people for the jobs they do appropriately or you run the risk that later some court will say they are constructively a half-owner of the business by virtue of their efforts be-cause they didn't get compensated properly."
While most accountants and lawyers concentrate on the technical aspects of such highly charged agreements, Pervin says he has helped many families arrive at solutions that minimize the damage that can be caused to relationships by the issues prenups raise.
"There's a fairness associated with it - not necessarily equal, but it's got to be fair," Pervin says. Ultimately, each person has to feel there is a reasonable plan in place in the event of a marriage breakdown.
A prenuptial agreement can also reduce discord during a later divorce, he notes.