Monday, April 21, 2014

How to Minimize Costs in a Matrimonial Separation

A sobering statistic for many is that over 40% of marriages will end in divorce before the 50th year of marriage. [1]  This does not exclude business owners and a matrimonial separation can result in significant professional fees for business owners, especially when the value of the business is a key area of dispute.  An independent business valuation can help to minimize legal and expert fees for business owners going through a matrimonial separation.
The division of property is a major issue in a matrimonial separation.  According to the Ontario Ministry of the Attorney General [2]:
"When a marriage ends, … the value of any property that was acquired by a spouse during the marriage and still exists at separation must be divided equally between the spouses.  Also, any increase in the value of property owned by a spouse at the date of marriage must be shared.  The payment that may be owed to one of the spouses in order to effect this sharing is called an equalization payment, or an equalization of net family property."
Upon separation a net family property (NFP) statement is prepared setting out the value of the assets and liabilities of each spouse as at the date of marriage and the separation date.  Privately held business interests (i.e. shares, stock options, restricted stock, etc.) constitute property, the value of which must be included in the NFP statement.  The assistance of a Chartered Business Valuator will likely be needed where there are business interests and the parties cannot mutually agree on the value of the those interests as at the marriage date or the separation date. 
Depending on the separation process (i.e. collaborative, mediation, litigation, etc.), the parties may agree to jointly retain one independent business valuator to value the business interests.  One party, however, may opt to individually retain an independent business valuator.  The other party will often then retain a separate independent business valuator to review, critique and respond to the other expert’s report.  This can be a costly process. 
Where spouses disagree over the value of the business significant legal and expert business valuation fees can be incurred towards various activities relating to the value of the business interests (e.g. document productions, discoveries, legal motions, expert reports, negotiations, critique reports, trial, etc.).  This can become a very costly, time consuming, and emotionally draining process. If the business valuation issue becomes very contentious, professional fees can quickly escalate to well over $100,000. 
Obtaining an independent business valuation for a fraction of this cost can help avoid a disagreement over value in the event of a marital breakdown, which is well worth it if it saves hundreds of thousands of dollars in professional fees.  By not having an independent business valuation (and discussing this issue with your spouse) you increase the chances of there being a dispute over the value of the business in the event of a matrimonial separation.
Contact us at or to find out more about the business valuation process and the types of valuation reports that CBVs provide.
1.  Source:, CANSIM Table 101-6511.

Sunday, April 13, 2014

Avoiding Costly Shareholder Disputes

Business ownership can be complicated, particularly when there are multiple shareholders.  The odds of disagreement and conflict among shareholders over various issues can be very high.  When shareholder relationships break down there must be a mechanism in place for dealing with the dispute or for enabling one or more of the shareholders to exit the business in a pre-determined manner. 
A shareholder buyout can quickly turn into a costly dispute if the value of the business has never been discussed and agreed to among the shareholders.  Different shareholders likely have different expectations regarding the value of the business.  Having an effective Shareholder Agreement and obtaining an independent business valuation can help avoid a very costly, time consuming and emotionally draining shareholder dispute.
I have been retained in many shareholder disputes to provide an independent expert business valuation for purposes of determining a price at which the departing shareholder’s shares should be acquired by the remaining shareholder(s) or redeemed by the company.
In my experience, these disputes can be devastating to the business as well as the individuals involved.  The shareholders become distracted and ultimately exhausted from preparing for and attending discoveries, meetings with lawyers and experts, settlement negotiations and arbitration or court proceedings.  Relationships are destroyed and ultimately the business suffers because the shareholders are no longer devoting sufficient time and attention to managing the company’s operations.
The importance of a Shareholder Agreement to privately held business owners cannot be over emphasized.  An effective Shareholder Agreement should address the following areas: i) compensation; ii) decision making; iii) entrance; iv) exit; and v) return on investment.  Privately held company shares are illiquid assets and the Shareholder Agreement should provide the shareholders with the means to liquidate an otherwise illiquid asset under certain triggering events.  For example, a buy-sell provision (or "shotgun" clause) allows for one shareholder to offer to buy the shares of another shareholder subject to the right of the other shareholder either: i) accepting that offer; or ii) buying the shares of the offering shareholder at the same price offered by that shareholder.
With respect to the valuation of the business and the individual shareholdings, the Shareholders Agreement should provide a definition of value (e.g. fair market value or fair value) and set out the process and timing for obtaining an independent valuation.  Many Shareholder Agreements stipulate that an annual or biennial valuation of the business should be prepared by an independent Chartered Business Valuator (CBV).  This independent valuation forms the basis for new shareholders to buy-in and for existing shareholders to exit or measure their return on investment. 
Committing to a formal business valuation allows the shareholders to discuss and agree to the value of the business before any potential disagreements arise.  In the event of a shareholder buyout, the valuation issue will have already been addressed.  The return on investment to the shareholders will be substantial if it means avoiding a costly, time-consuming, emotionally draining and perhaps devastating shareholder dispute down the road.
Contact us at or to find out more about the valuation process and the types of valuation reports that CBVs provide.

Saturday, April 05, 2014

Business Valuation – Critical to Enhance Value and Manage Wealth

As a business owner, the value of your business likely represents a significant portion of your wealth.  According to a publication by Mercer Capital:
"About 75% of all private equity is owned by households for whom it constitutes at least half of their total net worth. Households with entrepreneurial equity invest on average more than 70% of their private holdings in a single private company in which they have an active management interest."  [1]
Enhancing and managing this privately held business wealth is critical to business owners and this process begins with an independent business valuation.
Value Enhancement
The process of enhancing the value of your business begins with a business valuation which provides a benchmark from which to measure value increases over time.  The valuation process will also identify key value drivers to focus on to enhance the value of the business.
Resulting value increases will provide a significant return on the investment in a business valuation and value enhancement initiative.  We have seen clients double their business value within a two year period

Potential purchasers will be very impressed if you have documented how you increased the value of your business over time and identified opportunities for further growth and value enhancement.  Your chances of attracting numerous suitors and securing a deal for top dollar will be greatly increased.
Wealth Management
In order to effectively manage your wealth you need to know the value of your assets, including your privately held business.  Annual fees are paid to wealth managers to manage your liquid investments (e.g. publicly traded securities).  Monthly statements are provided setting out the value of these investments to assist with decision making.
Privately held business owners often spend significant time managing the business but little time managing the wealth associated with their business.  An effective wealth management strategy allocates a percentage of the value of the business to managing this privately held wealth.
The One Percent Solution suggests recommends for business owners to invest 1% to 2% of the value of the business towards a "wealth management budget" which includes, among other things, an annual business valuation and monitoring critical success factors and key value drivers.
All business owners will one day exit their business.  An independent business valuation can help you identify what percentage of your overall wealth is tied up in the business and identify key areas to focus on to enhance the value of your business.

Contact us at or to find out more about the valuation process and how it can help enhance the value of your business and manage your wealth.
1.  Source: The One Percent Solution, Z. Christopher Mercer, 2007.