Written by Tracy Knight, Associate
Yes, it’s true. Business professionals, developers, and entrepreneurs are used to taking calculated risks in order to grow the company. It is one of the foundations of success. But if a business could crumble as a result of a business partner’s shaky marriage, everyone will agree there is a risk that business owners need to mitigate.
Consider your business. You may have built up the company, family farm, real estate portfolio, or other entrepreneurial venture by investing long, hard hours, learning from your parents, joining forces with your friend or siblings, and hoping to pass on your now successful venture to your children. Rather than looking at yourself, consider your business partners and their spouses (maybe your in-laws, maybe your siblings, maybe your best friend). You own a growing enterprise with someone else and you have no control over your partner’s personal relationship with his or her spouse. While your own marriage may be solid, consider what may happen if there were a relationship breakdown happening to one of your business partners.
In British Columbia, the Family Law Act says that each spouse is entitled to 50% of family property that exists on the date of separation. “Spouse” includes people who have lived together in a marriage-like relationship for 2 years. “Family property” is anything that either of the spouses own. There are some exceptions to family property such as assets brought into the relationship, in which case the growth in value of those assets is family property, still to be divided.
Translated into the business scenario, you could be in a situation where a spouse is entitled to 50% of the value of one partner’s portion of the business. Can your business partner afford to make that payout in cash? Likely not. Can your business handle buying out one of the partners so that a payout can be made? Maybe. But your partner will no longer be a partner in the business – what if that partner’s contribution is crucial to your business success? What if your business branding is connected to the business partners? What if a buyout must be made at a time when other unexpected expenses arise? What if…?
A marriage agreement is not about unfairness to a departing spouse. Instead, it is a pre-determined plan to mitigate risk – it should set out mechanisms for payouts that are business-centered and fair to the departing spouse. The business plan should consider valuations, privacy, and the circumstances when a partner will be bought out. Once a family law matter is underway, the business-friendly options to carry out a division of property (and indeed some of the rational thought processes) are diminished. Judges tend to employ cut and dry divisions of property and only after the financial affairs of the business have been aired before the court. Parties can reach alternative agreements, but there is little incentive for a departing spouse to help the business survive. The reality is that self-interests tend to take over.
Successful business plans include marriage agreements. Seek advice from a legal team that approaches your business strategy with input from all areas of law.