Family business transitions: Reducing risks with RWI

Using RWI to navigate the complexities of business transitions

Family-owned businesses are the foundation of both the Canadian and U.S. economies, representing a significant portion of private companies in each country. Family businesses employ more than half of the private workforce in the U.S. and just under half in Canada, showing their critical role in the economies of both countries. However, the challenge of generational transition is a critical issue on both sides of the border.^[1] With an aging population, succession planning remains a significant challenge for both Canadian and U.S. family businesses, as shown by the fact that only about 40% of U.S. family businesses successfully transition to the second generation and just 13% to the third generation.^[2]

In this article, we explore the challenges faced by buyers and sellers of family-owned businesses and how Representation and Warranty Insurance (RWI) can help address many of those challenges, ensuring a smoother negotiation process and increasing the likelihood of closing a transaction. 

Unique challenges of family business acquisitions

RWI can help allay many of the unique challenges involved in the transition of family-owned businesses, including:

1. 01

   Post-closing liability allocation

   In many family-owned businesses, multiple family members are involved and have a stake in the business in varying degrees, which can make it challenging to determine which individual(s) should be responsible for backstopping any post-closing indemnities. Because family business owners can have heightened emotional as well as financial ties to the business, conversations around indemnities can sometimes risk derailment of negotiations between buyers and sellers.

2. 02

   Due diligence hurdles

   Family-owned businesses may not have the organizational hallmarks and business recordkeeping of more professionalized entities. For instance, almost a quarter of family-owned businesses in Canada have minimal governance structures (i.e., they do not hold formal board meetings, or may lack shareholders’ agreements, advisory boards, etc.).^[3] This, in turn, may leave gaps in a buyer’s diligence, which can stall or even kill a deal.

3. 03

   The emotional factor

   The sale of a family business can be the most important part of a lifetime’s or generation’s This can be a very emotional event for many owners. These factors can color the negotiation of the transaction and, as such, require a nuanced approach from a buyer and its advisors in navigating these sensitivities and ensuring a successful transaction.

Representations and warranties insurance: A strategic solution

Value proposition for buyers

• Enhanced indemnity protection and certainty of recovery: Without RWI, a buyer will typically seek indemnity protection from the sellers, including recourse to an indemnity escrow and potentially also against individual sellers for claims exceeding the indemnity escrow with respect to breaches of specific representations and warranties. This creates enhanced risk for the buyer, as recovering losses personally from various family members can be challenging. RWI, on the other hand, provides buyers with an avenue to make a direct claim against a credit-worthy insurer, thus mitigating financial risk.
• Preservation of key relationships: Maintaining strong relationships with the sellers post-closing is often critical for buyers. Whether the goal is to retain key talent (including any family members involved in the business post-closing), to use long-standing relationships with customers and suppliers, or to ensure a smooth transition, these post-closing relationships can play a pivotal role in determining the success of an acquisition. RWI ensures these post-closing relationships remain intact and do not turn adversarial by shifting the burden of potential indemnity claims to an insurer instead of the sellers.
• Deal facilitation and valuation certainty: By addressing certain perceived risks and significantly minimizing or eliminating escrows, RWI allows sellers to receive more of the purchase price on closing, and therefore can bridge valuation gaps and facilitate deals that might otherwise collapse.

Value proposition for family sellers

• Clean exit and maximized proceeds: RWI can eliminate — or significantly reduce —  the need for escrows and indemnities. This means family members can walk away from the closing with more cash on hand and fewer post-closing strings attached. This allows the family to confidently close one chapter of their lives and move forward to the next.
• Legacy protection: A business is more than an asset for many families — — it is a legacy. It represents years of sweat equity and sacrifice. The idea that unforeseen liabilities could tarnish this legacy after a sale is enough to keep sellers awake at night. RWI steps in as a safeguard, taking on those post-closing risks so that family members don’t have to. This results in peace of mind for the sellers and assurance that a single indemnity claim won’t undo the reputation and wealth they’ve spent a lifetime building.
• Streamlined negotiations and increased deal certainty: Family dynamics can add a layer of complexity to even the smoothest transactions. When you factor in issues like indemnities or escrow terms, negotiations can quickly become fraught, particularly when multiple family members bring their own priorities to the table. RWI clears much of that clutter, resulting in fewer prolonged disputes between the parties (and family members) and more attention to successfully transitioning the business to its new owners.

Simplifying RWI for family business transitions

RWI has smoothed the path to changing hands for family-owned businesses by offsetting some of the complicating factors inherent in such transitions. It gives buyers confidence and protection while enabling selling family members to secure their financial future and legacy.

At WTW, we have worked with numerous buyers and sellers, acquiring and selling family-owned businesses and guiding them through the process of securing RWI. Our expertise in this arena ensures that we manage the complexities involved in these transactions effectively, ultimately leading to a positive outcome for both the buyer and seller.

Footnotes

1. Family Business Facts,” Cornell SC Johnson College of Business, accessed February 14, 2025, Family Business Facts ; Family Businesses Generate Almost Half of Canada’s Private Sector GDP and 7 Million Jobs, According to New Conference Board of Canada and Family Enterprise Xchange Report,” Newswire, accessed February 14, 2025, Family Businesses Generate Almost Half of Canada's Private Sector GDP and 7 Million Jobs According to New Conference Board of Canada and Family Enterprise Xchange Report. Return to article undo
2. Family Business Facts,” Cornell SC Johnson College of Business, accessed February 14, 2025, Family Business Facts. Return to article undo
3. Statistics on Canadian Family Enterprise,” Family Enterprise Canada, accessed February 14, 2025, Statistics on Canadian Family Enterprise. Return to article undo

Disclaimer

WTW hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

Authors

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Rishi Dhir

Head of Canada, Transactional Insurance Solutions

email Email phone 1 647 518 2935

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Simone Bonnet

Head of Transactional Insurance Solutions

email Email phone +1 212 309 0923

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