Helping Family Businesses Survive the Pandemic and Divorce
We do not need to re-iterate the economic consequences the coronavirus has sprung upon society. With Canada seeing countless unemployment claims and businesses suffering, it is safe to say that the virus has infected our economy and the side effects are still unknown. One side effect however as we have reported, unfortunately, is that many couples across the globe may be seeking a divorce with their significant other due to quarantine and financial stressors.
It is important for couples seeking to pursue this avenue that they be mindful of a few core things, namely: (i) the best interests of the children, (ii) civility with your partner, and (iii) adequate planning to ensure a successful separation.
Family run business owners fear how a divorce will affect the business they have spent their life building. While business owners have control over the work they put into their business and the legacy they are building for their family, they may have little influence over a relationship breakdown. The effects of this breakdown on a business can cause additional stress above and beyond the heartache associated with restructuring a family.
In many family law matters involving children, the spouses are able to agree to cooperate in order to address the best interests of the children. In many ways, a family business can be used as a similar incentive: spouses can agree to cooperate in order to address the best interests of the family business. While fueling conflict is an almost unavoidable side effect of the court system, a collaborative approach is a very effective method in reducing the impact of separation and divorce on family run businesses. This process seeks to ensure that the business remains viable for both spouses, as well as future generations.
What is Collaborative Practice?
Collaborative Practice Family Law offers an effective alternative to the inherently adversarial court process. Both parties must enter into the process voluntarily, and agree to resolve their issues respectfully. While the court process is oriented based on the legal rights and obligations of both parties, the collaborative process allows both parties to generate options that best suit their family. This allows the family much more self-determination in creating an outcome based on their specific needs. Specially trained collaborative lawyers work with both parties to guide them through the process, and are available to offer legal advice and support to their clients when appropriate.
Both parties’ lawyers also commit themselves to coming to a mutually agreeable resolution. The parties must agree in advance that should the collaborative process fail, neither party may use their collaborative lawyer to advance their position in court. This creates an environment conducive to negotiation and settlement, outside of court.
The underlying philosophy of the collaborative divorce process is that the parties mutually agree to completely avoid the court process, with the result being a faster, cheaper and more amicable divorce or separation. In the context of Covid-19, many court matters are only being heard on an emergency basis, however collaborative practice meetings are still functioning remotely on an ongoing basis.
A Flexible Alternative to Court
The collaborative process allows spouses to shape the outcome of their separation and divorce. In contrast, judges in the court system have limited statutory options available them when presented with these disputes. The outcomes in the family court are framed by the legal rights and obligations of the parties under the Family Law Act and the Divorce Act. The family court will not consider the time and effort that goes into building and running a business, and may not be well equipped to adjudicate issues of income when the revenue generated by family business is not necessarily guaranteed or consistent. Issues such as liquidity of assets, the risks associated with owning a business, and ensuring that funding remains stable are complex, are often fodder for experts and often times disputing spouses higher their own experts. The result is dueling experts and approached to dealing with family businesses. This can be a very expensive legal endeavor often costing the family several hundred thousand dollars in legal fees and court costs. The court may order the sale of business at a significant discount, which ultimately also results in a significant loss of family wealth.
Collaborative practice is an option that operates outside of the court system. Rather than simply applying a legal model, the focus is one the goals and interests of the parties and creates flexibility in outcomes and opens the door to creative settlement options that would not otherwise be available in a court setting. It allows the spouses much more privacy than a court process does, which a huge additional benefit to those owning family businesses. Issues such as tax planning or corporate share transfers can be done with reduced publicity. Both spouses are able to sit down with one another, and their lawyers, to discuss a solution that is beneficial to both the business and the family unit. Spouses can determine whether or not it is a realistic option to continue to operate the business jointly, or if one should step down. In the latter situation, flexible payment structures can be created to ensure that the business is not destroyed in the wake of one spouse leaving. This fosters the health of the family business, and promotes growth and stability for future income and the building of capital which ultimately supports the family.
However, there are many intricacies involved in the enmeshment of family business and the process of separation and divorce. As an alternative to a purely rights based approach, other options can be considered in the collaborative approach, including:
- Family trusts or holding companies as a method of sharing income from the family business;
- Tax planning, avoiding the possibility of triggering a Canada Revenue Agency audit;
- Considering the formation of a new family trust;
- Employment of children in the family business;
- Estate, succession, and capacity planning;
- Ensuring insurance is in place to cushion the effects of any risks;
- Gifting shares or portions of the family business to children or other family members;
- Maintaining the privacy of the family business;
- Managing the continuation of income streams;
- Splitting income amongst family members;
- Delaying equalization or sharing business payments (Ie: if and when the family business sells);
- Preserving the family legacy for generations; and
- Recognizing and predicting the ebb and flow of the market and business patterns
Unlike the court system, the collaborative process is unique in that it offers the additional benefit of involving neutral professionals who specialize in associated areas, listed above. These neutrals are able to address relevant areas of the family law matter, often with more experience in their particular field than lawyers. Neutrals are also able to complete work at their hourly rate, rather than at the lawyer’s fee. They are also able to take on some of the information gathering that would alternatively be completed by the spouses, which can be stressful. This makes including neutrals an efficient way to deal with issues in a cost effective manner.
Collaborative Financial Specialists may be accountants, financial planners, and business valuators who have expertise in helping separating families address issues relating to the family business. They play a vital role in the collaborative process by ensuring that clients provide full and frank financial disclosure. Financial disclosure includes aspects such as income, liabilities, and assets of both the spouses and the business. A business valuator may value the business and, as in the case of many self-employed individuals, complete an income analysis to determine yearly income for support purposes. In the collaborative process, family business owners can work alongside the financial professional and/or business valuator to assist them in understanding the intricacies of the business based on its unique field.
Financial Specialists thoroughly vet the documents and prepare detailed reports which help to streamline settlement discussions. Financial Specialists further add value to the collaborative process by educating clients about their finances and helping to manage their expectations from a neutral perspective. This impartial stance helps to keep client expectations realistic, making negotiated settlement more likely.
Another key benefit of financial professionals is their ability to “even the playing field”. In some family matters, one spouse may have been much more involved in the finances of the family business. The other spouse may feel they are ill equipped to negotiate the finances associated with the business, and may worry about being taken advantage of by their spouse. A financial neutral can spend time separately with both parties to ensure that all the cards are on the table, and that each spouse understands the basis upon which they are negotiating.
While it may not immediately seem to be a common sense approach to include a family professional within the context of a family business matter, family professionals can often deal with many of the underlying issues associated with restructuring a family and a family business. Emotions can run additionally high when dealing with the very real and salient issues associated with the individuals which make up a family business team.
Much of the concept of “Interest Based Negotiation” centers on interests that are not purely financial. A family professional can assist in identifying and bringing these interests to the table. Anger, loss and grief are a natural part of divorce or separation, especially when a family’s livelihood is on the line. A family neutral gives families access to support and guidance for managing these emotions which can intensify the conflict and derail settlement attempts in traditional divorce.
Collaborative Family Professionals are counselors, social workers, psychologists or mediators who have specialized skills in handling the emotional aspects of the issues pertaining to separation and divorce. They further discuss parenting, and help ensure that feelings, needs, and concerns are understood and respected where children concerned. This is especially pertinent when there are children working within a family business, who have their own independent concerns about how the divorce will affect their future within the business context.
Privacy, Protection, and Planning
Another consideration that has arisen in light of the pandemic’s affect is the importance of privacy, protection, and planning in managing the effects of separation and divorce on family businesses. One illustration of this arose in a case whereby both spouses owned shares in the family company. As an additional wrinkle, a third business partner was involved and actively expressed concerns about the effect of the separation and divorce on the business.
One spouse actively managed the finances of the business, and the other was less involved. This created an unbalanced feeling for the second spouse, who felt that they were open to being taken advantage of financially. The spouse in active management of the business was incredibly concerned about market changes and the viability of the business going forward into the future. This vulnerability split into discussions around how the business should be properly valued.
The spouses had several adult children who had been supported by the family business in various ways throughout their teenage years and adulthood, either through part time jobs or full time employment. These children had very vocal views on how the couple’s separation should proceed. The children also felt that the family cottage should remain in the possession of the spouse who was in active management of the family business, as it was a retirement plan.
In this matter, a full team approach was utilized to create a creative solution which met the spouse’s needs amidst the “background noise” or the “Greek chorus” of the children and the business partner. The family professional was able to mitigate any backlash from the children expressing their feelings about the family business and the cottage, and the financial professionals were able to ensure that the non-managing spouse felt competent enough to actively participate in the financial negotiations.
In order to ensure that the family business was preserved, several options were suggested by the team to the spouses:
- Shares from non-managing spouse be transferred to managing spouse; other family property transferred to non-managing spouse;
- Shares from non-managing spouse be transferred as a gift to the children;
- Non-managing spouse retains cottage; managing spouse leases family cottage back and covers operating and capital costs with option of re-purchasing in the future; and
- Non-managing spouse retains the shares for a period of five years during which the managing spouse acts as the voting proxy, after which time the managing spouse has the option of buying back the shares at the current value
Associated issues such as the capital gains liability of each scenario, as well as the valuation dates for transferred property were also taken into account. Notably, these options would not be available in the traditional court context. Perhaps most importantly, the spouses would not have had the “luxury” of being supported by an interdisciplinary team and provided time to process and decide which option made the most sense to themselves, their family, and their business.
The above case examples illustrate the ability of collaborative practice to shape a resolution with the best interests of the family business at the core. The collaborative process emphasizes privacy, protection, and planning. By keeping the matter outside of the courtroom, families can maximize their privacy with respect to the highly personal matter of restructuring their family and business. The collaborative process offers a respectful alternative to the court system for those wishing to ensure that their legacy remains intact for generations to come through estate and succession planning for the business. The business does not need to be destroyed by family restructuring. Minimizing the financial and emotional impact of a separation and divorce on both the family and their business is a tall order, but it can be done with the support of an interdisciplinary team who is specially trained to identify creative solutions with the goal of resolution. This process allows spouses to take back control of your family’s future from impartial third party adjudicators. Divorce and separation may represent both an ending and a beginning. Collaborative practice helps spouses anticipate and include their need to move forward, and makes the future of their business a key priority.