How can I buy my ex-spouse out and take control of the company?

“My spouse and I each own 50% of a business that we ran together during the marriage. How can I buy my ex-spouse out and take control of the company?”

If the ex-spouses can’t agree to continue operating the business together, the decision as to who gets to retain ownership and keep control of the company is the result of a financial negotiation between shareholders.

A first step would be to examine the terms of the shareholders’ agreement, if one has been prepared. If both shareholders can agree on who should take over the business, the shareholders’ agreement may set out a formula on how to calculate the value of the departing shareholder’s portion of the business. The shareholders’ agreement may also stipulate procedures on how a sale should take place and set a timeline for the sale; both sides may be required to retain the services of a Chartered Business Valuator, who is asked to tender their opinion of value with a set timeframe.

Shareholders’ agreements can also provide both parties with a means to buy their spouse’s shares in the event that the shareholders disagree as to who will gain control of the business. A common tool used in a buy sell agreement is a “shotgun clause”, where one shareholder makes an offer for the other’s shares. If the offer is rejected, the rejecting shareholder must then purchase the offerer’s shares at the same price. There are usually mandatory time periods during which offers must be tendered and responses submitted, ensuring that the dispute is resolved quickly.

Shotgun clauses can be tricky for shareholders, though, because it’s important for both shareholders to have a clear idea of what a ‘fair’ price for the shares should be. If the offer is too high, the offerer will end up overpaying for the other’s shares; if the offer is too low, they will be forced to sell their shares at a discount. If a resolution cannot be reached amicably and the shareholders are forced to exercise a shotgun clause, each party would be wise to retain a valuation expert so that they can properly tender or evaluate an offering price.

If no shareholders’ agreement exists, nothing short of direct negotiations between ex-spouses can determine who retains control of the business and at what cost. If relations are amicable, spouses can always take advantage of the collaborative process and jointly retain a valuation expert to assist them in setting a purchase price. The focus of a collaborative engagement is to create a win-win solution, as opposed to a more adversarial approach that focuses on creating a “winner” and a “loser”.

Finally, if no shareholders’ agreement exists and relations between spouses are not amicable, there are no real quick fixes. Both parties may entrench in their positions, lawyers may get involved, the process may take years to resolve and the Courts may be the final arbiters. The net result – particularly when both shareholders are involved in the business – is that the company they’re both fighting over may end up suffering as a result of the dispute over ownership and the business may suffer from a lack of direction.

Regardless of the approach, the final step in the negotiation will inevitably be funding the buy-out. It’s rare that either spouse has the cash reserves to purchase the other’s shares outright. Instead, legal counsel and financial professionals should be consulted in order to evaluate what items of an individual’s net worth could be financed or used as an offset to the transfer of shares. If the spouses own other property – like cottages, or even a matrimonial home – their share in these assets or some portion thereof can be used as an offset for the interest in the operating business.

Where an operating business jointly held and run by both spouses is to be split or sold to one spouse it adds another layer of complexity to the ultimate division of assets in the divorce process and requires experienced hands to offer working.

Gordon Krofchick, CA, CBV is President of Krofchick Valuation Partners and is a forensic accountant with over 30 years’ experience in working with issues that impact a matrimonial separation, divorce, or other complex financial and litigation issues.