Addressing Family Business Ownership in Separation Agreements

1. AddressingFamilyBusiness Ownership in Separation Agreements BTLLawFirm October,2024 SparationAgreementOntario.ca Page 1

2. Contents IdentifyingtheFamilyBusinessasProperty............................................................................................2 DefiningtheFamilyBusiness as aMarital AssetorSeparateProperty...............................................2 Importance of Distinguishing Ownership Shares in the Business........................................................ 3 ValuationoftheFamilyBusiness............................................................................................................4 ProfessionalValuation........................................................................................................................4 Factors Considered.............................................................................................................................5 OptionsforDividingBusinessInterests...................................................................................................6 One Party Buying out the Other’s Share to Retain Full Ownership ..................................................... 6 StructuringanArrangementfor Continued Joint Ownership Post-Separation...................................7 Selling the Business and Dividing the Proceeds as Part of the Separation .......................................... 8 ProtectingBusinessOperations..............................................................................................................9 Non-InterferenceClauses:..................................................................................................................9 Confidentialityand Non-CompeteClauses: ......................................................................................10 HireOntario SeparationAgreementLawyer.........................................................................................11 Identifying theFamilyBusiness asProperty The first step in addressing family business ownership in a separationagreementistoestablishwhetherthebusinessisa maritalassetorseparateproperty.Thisdistinctionisessential becauseitdetermineshowthe businesswillbe treatedinthe divisionofpropertyduringseparation. DefiningtheFamilyBusinessasaMaritalAsset orSeparate Property Afamilybusiness maybeconsideredamaritalassetifitwas establishedorgrewsignificantlyduringthemarriage,orifboth

3. spousescontributedtoitsoperationsandgrowth.Ifthebusiness existedbeforethemarriageandwasnot subjecttoco-ownership or investmentfromtheother spouse, itmayberegardedas separateproperty. • Determiningwhetherthebusinessisamaritalasset orseparate propertyoftendependsonfactorssuchas: • When the business was established (before or after the marriage). • Contributionsofbothspousesto thebusiness(financial, managerial,oroperational). • Changes in thebusiness structureduringthe marriage, • suchas addingthespouseasaco-owner or partner. • ImportanceofDistinguishingOwnership Sharesin the Business • Oncethefamilybusinessisidentifiedasamaritalasset,it's importanttodeterminetheownershipsharesofeachspouse. Thisprocessinvolvesvaluing thebusinessandevaluating each spouse’s contributions,bothfinancialandnon-financial. • Contributions can include timeinvestedin runningthe business, • providingcapital,orofferingservicesthathelped thebusiness succeed. • In some cases, only one spouse may legally own the business, but the other spouse’s indirect contributions may entitle them to a shareofthebusinessunderOntario’sfamilylawprinciples. • This can include:

4. Operational involvement, such as managing or assisting withbusinessactivities. • Supportive roles, like taking on household duties that allowedtheotherspousetofocusonthebusiness. • Financialinvestmentsmade during themarriagetohelp • growthebusiness. • Aseparationagreementlawyercanassistindetermininghow to fairly distribute these shares, ensuring that both parties receive afairdivisionofthebusiness’svalue. • Valuationofthe Family Business • ProfessionalValuation • Aprofessionalbusinessvaluationisessentialinestablishing the fairmarketvalueofafamilybusiness.Thisistypicallydone by aqualifiedbusinessvaluatororforensicaccountantwhois experiencedinthenuancesofvaluingprivatelyheldbusinesses. Theseexpertsconductanin-depthassessmentofthebusiness's financialperformance,marketconditions,andgrowthpotential. Their evaluation is critical in ensuring the separation agreement accuratelyreflectstheworthofthebusiness, preventingeither spousefromunfairlygainingorlosinginthedivisionofassets. • Engaging financial experts is particularly important for businessesthatarecomplexorhavefluctuatingvalues.Their objectiveanalysisprovidesanimpartialbasisfornegotiation, helping spouses avoid conflicts or legal battles that may arise fromdifferingopinionsonthebusiness'svalue.Additionally, • the expert’svaluationreport maybe requiredbythecourt ifthe separationagreementiscontested.

5. FactorsConsidered When valuingafamilybusiness,severalfactorsareconsidered toensureacomprehensiveassessment.Theprimaryfactors include: Revenue: The business’s pastandcurrentrevenuestreams area fundamentalcomponent ofitsvaluation.Consistent revenuegrowthovertimeoftenindicates ahealthy business,whichcanincreaseitsvalue.Financialexperts review historical revenue data, current contracts, and projectionstoassessthebusiness'sprofitability. Assets: Businessassets—bothtangibleandintangible—arealso takenintoaccount.Tangibleassetsinclude physicalitems likeproperty,equipment,and inventory.Intangibleassets may consist of intellectual property, brand value, and goodwill.The valuationwill consider boththe bookvalue and fair market value of these assets to get an accurate picture ofthebusiness'sworth. Liabilities: Abusiness’sdebtsandliabilitiescansignificantlyimpact its overall value. Any outstanding loans, debts, or other financialobligationsaredeductedfromthebusiness'sassets todetermineitsnetvalue.Athoroughreviewofthe company’s balancesheet isnecessarytoensurethat all liabilities areconsidered. GrowthPotential: The futuregrowth potential ofthe businessisanother importantfactorinvaluation.Thisincludesanalyzing

6. market trends,the business’scompetitive position, customer loyalty, and the scalability of its products or services.If thebusinessispoisedforexpansionorhas demonstrated strong growthtrends,itcouldsignificantly increaseitsvaluation. • Financial expertsmayalsoevaluateother elements,suchas: • Profitmarginsandhistorical earnings. • Marketcompetitionand the business'sindustry standing. • Cashflow andoperating expenses. • Keypersonnelorleadershipstability,which caninfluence the business’sfuture success. • Optionsfor DividingBusinessInterests • OnePartyBuyingouttheOther’sSharetoRetainFull Ownership • Abuy-outagreementisoftenthesimplestsolution ifone spousewishestoretainfullcontrolofthebusinessafter separation.Inthisarrangement,onespousebuysouttheother’s share of the business, allowing them to continue managing it without theinvolvementof theirformerpartner. • Thebuy-outprocesstypicallyinvolves: • Determining the value of the other spouse's share in the business, basedontheprofessional valuation. • Negotiatingthetermsof the buy-out, including the paymentamountandmethod(lumpsumorinstallments).

7. Securing financing, if necessary, for the purchasing spouse topayfortheother’sshare. • Abuy-outcanbeafavorableoptionwhenonespousehasa deeper connection to or role in the business. However, the purchasingspousemusthavethefinancialmeansto buyout • their partner’sinterest,eitherthrough personalassets orexternal • financing. Involving a separation agreement lawyer can ensure that the buy-out terms are legally sound and that both parties are protected. • StructuringanArrangementforContinuedJoint Ownership Post-Separation • Insomecases,itmaybebeneficialornecessaryforbothspouses tocontinueco-owningthebusinessaftertheirseparation.Aco- ownership agreementallows for the continuedoperation ofthe businessunderjoint control,eventhoughthemarriagehas ended.Thisoption ismoreviableifbothspouseshavebeen activelyinvolvedinthebusinessandcanmaintainaprofessional workingrelationship. • A co-ownership arrangement requires clear terms to avoid conflictsandmisunderstandings,suchas: • Roles and responsibilities of each spouse in the day-to- day operationofthebusiness. • Decision-making processes, including how major business decisionswill behandled. • Profit-sharing agreements,detailinghowprofits(or losses)will bedistributedbetweenthespouses.

8. Exit strategy, outlining the steps if one party wishes to sell theirshare orleave thebusinessatalater date. • While co-ownership can bea practicalsolutionforkeepingthe business runningsmoothly,itrequiresahighlevel of cooperationandtrustbetweentheex-spouses.It’sessentialto draft a detailed and legally binding co-ownership agreement with thehelpofalawyertopreventfuturedisputes. • Selling the Business and Dividing the Proceeds as Part of the Separation • When neitherspousewantstoretain ownershipofthe business or ifit’simpracticalforthemtocontinue co-owningit,thebest option maybetosellthebusinessanddividetheproceedsas part oftheseparationagreement.This approachensures aclean financial breakand allowsbothparties tomove on independently. • Thestepsinthisprocessgenerallyinclude: • Listing the business for sale with the help of a business brokerorreal estateagent. • Negotiating the sale price with potential buyers based on the business’sprofessionalvaluation. • Dividing the proceeds of the sale between the spouses accordingtotheirownershipshares. • Sellingthe business can bea morestraightforward solution in • cases where continued ownership isn’t feasible. However, it may take time to find the right buyer, and the final sale price could be lower thananticipated dependingon marketconditions.

9. Additionally, there may be tax implications from the sale, which should be considered during the negotiations. Consulting a financialexpertoraccountantisadvisabletoensurethatthe sale and divisionofproceedsarehandledcorrectly. • Protecting BusinessOperations • Non-InterferenceClauses: • Ensuring One Party Cannot Interfere with Daily Operations or Management • Anon-interferenceclauseisdesignedtopreventonespouse frommeddlinginthedailyoperations,decision-making,or managementofthebusinessafterseparation.Thisisparticularly importantincaseswhereonlyonespousewillcontinue managingthebusinesspost-divorce,orifonespousebuysout the other'sinterest. • A well-drafted non-interference clause can address the following: • Restricting communicationbetweentheformerspouse and employees, suppliers, or clients, ensuring they cannot undermineorinfluencebusinessdecisions. • Prohibiting access to business accounts, proprietary information, orsensitivedocuments,especiallyifthe formerspousenolonger hasany ownershipinterest.

10. Limiting involvement in strategic or operational matters, making sure the spouse with no active role or ownership stakedoesn’tparticipateinbusiness decisions. • Such a clause is crucial for maintaining the integrity of the business and ensuring that the operations run smoothly without theriskofinterferencefromaformerspousewho maystill harborpersonalorfinancial interests. • ConfidentialityandNon-CompeteClauses: • ProtectingBusinessInterestsandPreventingCompetition from a Former Spouse • Inmanycases,aformerspousemayhavebeenprivytosensitive businessinformation,includingtradesecrets,clientlists,or proprietary practices. To protect this information, a confidentiality clause should be included in the separation agreement.Thisclauseensuresthatthespouseleavingthe businesscannotdisclose anyconfidentialinformationtothird parties,competitors,oruseitforpersonal gain. • Aconfidentialityclausetypicallycovers: • Tradesecretsandproprietaryprocessesthatgivethe businessacompetitive edge. • Customer and client lists, as well as key vendor relationships. • Financial records and strategic plans, which could be used todamagethebusiness ifdisclosed.

11. In addition to confidentiality,anon-compete clausecan be included to prevent the former spouse from starting or working foracompetingbusiness.Thisisespeciallyimportantin industrieswherecompetitionisfierceandtheformerspouse may have the knowledge or resources to directly compete with the business. • Anon-competeclausecanoutline: • A specific time frame during which the former spouse is prohibitedfromengaging in acompetingbusiness. • Geographicrestrictions, limitingtheformerspousefrom operating in the same region or market where the original businessisestablished. • Industry-specific restrictions,preventingthespousefrom • working in or starting a business in the same industry or sector. HireOntarioSeparationAgreementLawyer Needhelp? VisitSeparationAgreementOntario.caorcallat (647)254-0909forexpert advice. Downloadfromhere– Template ofSeparation Agreement Form Ontario Separation Agreement Outline|Separation AgreementTemplate |SeparationFAQs