Prenuptial Agreements and the Small Business Owner

In a previous blog post, we discussed the importance of prenuptial and cohabitation agreements for individuals marrying or entering into common law relationships.  We set out a number of advantages and reasons for entering into agreements of these types, and explained how they benefit all people regardless of whether they are just starting out in life, or are at the end of their careers and ready to start their retirement.

While we discussed the benefit and advantages of prenuptial agreements in general in our previous post, today we are going to discuss the significance of prenuptial agreements in respect of a specific career path.

Alberta has always been a hub of entrepreneurship; it is province that is built on the visions of self-starters.  As a result, many individuals in Alberta are self-employed, either as sole-proprietorships or through their own corporations.   Just like any other property that is developed or accumulated throughout the course of a marriage, corporate assets and interests can also be subject to claims from divorcing spouses under the Matrimonial Property Act.  As a result, a portion of an individual’s business – sometimes their sole source of income – can be claimed by a spouse during a divorce.

Such a claim can lead to a number of detrimental outcomes.  Firstly, attempting to assign a value to a corporation or a business is not always straightforward and can lead to significant conflict, oftentimes resulting in the need for expensive valuations from accounting experts.  Secondly, if the majority of a couple’s assets are tied up in a business or corporation, the individual who wishes to keep the business may not be able to afford to buy out their spouse without taking out financing, selling off corporate assets, or even breaking up the business.

As a result, entrepreneurs, small  business owners, and consultant can really benefit from entering into prenuptial or cohabitation agreements prior to marrying or entering into a common law partnership.  The prenuptial agreement allows those who built their own businesses to protect their hard work and sacrifice by creating certainty as to how the business will be dealt within the event of a divorce.

Additionally, those in the medical, legal, and accounting field often operate through their own Professional Corporations.  It is often that those just starting out in those industries are also entering into marriages and common law relationships at the same time.  The administrative bodies such as the CPSA, the AMA, or the CPA, which govern these professions provide ample advice to new professionals about setting up professional corporations and managing their practices.  However, these practices are just as subject to division in a divorce as any other corporation.  The significant complexity that is unique to these professions, in respect of how it may be treated as property during a divorce, is that these corporations often do not hold assets or earning.  Rather their value can be derived from the “book of business” – the clients that rely upon the professional for help.

While valuing a traditional corporation can be difficult, attempting to value a professional corporation that holds it value on the basis of its clientele can be exceedingly problematic.  This is not only impractical because of the difficulty on trying to place a value on the business to be had solely from its ability to service and maintain its clients, but also because it is often that the entire value of the business is attributable almost solely to the person who is operating the corporation.  Without that person, the clients might leave, and the actual corporate entity might be worth nothing to another person.   As a result, valuation of this type of “goodwill” value will have to assess how much of a contribution that the spouse has made, in some form or another, to the other person’s ability to build and develop the business.  These contributions are often not even financial in form, but engage consideration of a spouse’s role in the home, and raising children, and assisting the other person in any number of indirect ways.

As a consequence, attempts at valuing businesses of these types often engage consideration of factors that are ambiguous and less straightforward than simply looking at financial details of a company.

Because of the difficulties inherent in the valuation of such businesses, professionals who run businesses that are more dependent on their client base than their assets can significantly benefit from prenuptial agreements and cohabitation agreements that serve to protect these corporations and create certainty as to how they may be valued and divided, if at all, in a relationship breakdown.

If you are about to marry or enter into a common law relationship, the team of lawyers at Mincher Koeman LLP can help you plan for the future and protect your interests.  Contact us at 403 910 3000 or reception@mincherkoeman.com.