My Spouse Owns a Business: What the Valuation Will Look At

You may know that your spouse’s company pays the family bills without knowing how its accounts work. When the relationship ends, salary, company profits and the value of the shares can become separate questions. A business valuation should explain the ownership interest’s value and the evidence behind it in terms you can follow.

You do not need to understand every accounting entry to ask useful questions. Start with what is being valued, at what date and on what information. Those instructions determine what the report is intended to establish.

The business value is part of a wider accounting

Manitoba’s family property guidance identifies business interests as potential commercial assets. It explains that equalization concerns the value of the property accounted for, rather than automatically dividing the assets themselves. A business may remain with its owner while its value is considered in the wider accounting. [1]

The valuation does not decide what your spouse owes you. Counsel must address the other assets, liabilities and legal adjustments affecting each person’s position. A share value is therefore financial evidence for the property accounting, not a calculation of the final settlement payment.

Identify the ownership interest and date

Ask which companies and interests the report covers. The trading business might rent premises from a related company, while investments sit in another corporation. Understanding that structure helps counsel identify the property that needs attention and helps the valuator avoid omitting or duplicating value.

The date also matters. Section 16 of The Family Property Act permits agreed valuation dates and supplies defaults where there is no agreement. [2] Counsel should confirm the relevant date and whether an earlier valuation is needed because your spouse owned an interest before the relationship.

A company may have changed substantially since that date. Today’s bank balance or a recent contract loss does not, by itself, explain its earlier position. Ask the report to make clear which period its financial evidence describes.

Look beyond revenue and reported profit

Revenue is the amount the business earns from selling its goods or services before deducting costs. A company with $2 million of annual sales may spend most of that amount on inventory, employees and overhead. Its sales total does not establish that the business is worth $2 million.

Reported profit also needs interpretation. The valuator examines the earnings the business can reasonably maintain, including whether unusual expenses or owner compensation require adjustment. Different businesses may be assessed using their earning power, underlying assets or relevant market evidence; the method should fit the circumstances. [3]

For example, a large expense might concern a one-time relocation rather than an ordinary annual cost. Conversely, an expense the owner expects to stop may need to continue under a purchaser. The reason for each material adjustment should be explained and supported.

Examine compensation and personal benefits fairly

If your spouse works in the company, part of its earnings reflects that work. A purchaser would need to perform those duties or pay someone else to do them. A valuation should consider that cost before attributing the remaining earnings to ownership.

Expenses paid through the company can have business and personal components. Vehicle or travel spending should be examined against its purpose and use, with attention to any benefit already recorded elsewhere. Payments to relatives also require an understanding of their work, rather than an assumption that every family payment is unnecessary.

This protects the analysis in both directions. Removing legitimate costs can overstate value, while accepting unsupported expenses can understate it. The investigation should follow the transaction and the supporting records regardless of which spouse raises the question.

Reconcile assets and debts to the share value

A business may own equipment, property or investments, but the values cannot always be added together without adjustment. Equipment needed to generate earnings may already be reflected in an operating business valuation. Adding its full value again could count it twice.

Debt, excess cash and amounts owed to or by shareholders also need examination. A bank balance may be required for upcoming payroll or inventory rather than available for distribution. The report should explain how the operating value becomes the value attributable to the particular shareholder.

Ask whether the conclusion is before or after any estimated personal taxes or selling costs. Those assumptions should be identifiable so counsel can consider their treatment. An estimated net amount does not necessarily represent cash that could be withdrawn immediately.

Assess how much depends on your spouse

Some customers deal mainly with the owner; others rely on an established team and the company’s service arrangements. The valuator needs to consider what earnings could continue under a successor. A profitable business can still have limited transferable earning power if it relies heavily on one person’s unique work.

The opposite can also be true. An owner may remain closely involved even though employees and systems could support a transition. Evidence about customer retention, management duties and previous absences helps test those competing explanations.

Understand what the engagement will investigate

Under CBV Institute’s standards, an independent valuation requires an objective conclusion supported by an appropriate scope of work. Significant assumptions need support, and serious information limitations can prevent a conclusion. Those requirements apply even where the report is prepared at the Calculation level. [3, 4]

A valuation should not be assumed to include a full forensic investigation of every transaction. If you have a specific concern, give counsel the date, amount and reason it needs attention, together with any records you hold. That allows the concern to be assessed and the need for further disclosure or investigative work to be discussed.

Ask questions before using the result

Useful questions concern what drives the conclusion: the main earnings adjustments, the ownership rights and the assumptions that have the greatest effect. Ask what information was unavailable and how that affects reliance on the result. Counsel can advise whether clarification, further work or an independent review is appropriate.

Business value and income for support also require distinct instructions, even when they use the same records. When approaching Acadia Hill, explain which financial questions counsel needs answered and provide any existing valuation. That helps establish an assignment that produces understandable evidence for the decision ahead.

Peter Fast, CBV, Acadia Hill

This article provides general information and is not legal, tax or accounting advice. The appropriate scope depends on the purpose, intended users, available evidence and specific circumstances of the engagement. Family law counsel should advise on how the law applies to your situation.