Representations and warranties insurance for family-owned businesses in Latin America

Family-owned businesses are a key pillar of the Latin American economy. More than 85% of the companies in the region are family-owned, accounting for 60% of the region’s GDP and employing more than 70% of its workforce. In addition, Brazil and Mexico alone account for 32 of the top 750 largest family businesses worldwide, employing over 1.6 million people in the aggregate.

However, family-owned businesses also bring unique dynamics where personal relationships and legacy perspectives can influence economic and strategic initiatives. These dynamics can also affect transactions involving family-owned business, including in situations where the business wants to participate in an M&A transaction.

Buyers and sellers of family-owned businesses should be aware of representations and warranties insurance (RWI) as a key solution to assist the negotiation process. In this article, we will delve into the significance of RWI in the context of family-owned businesses and how it is a game-changer in protecting the interests of both sides of the deal.

Understanding reps and warranties insurance (RWI)

Representations and warranties (R&W) are statements made by the seller in a purchase agreement or merger agreement regarding the target company's financial, operational and legal status. These statements serve as assurances to the buyer regarding the target company's condition and as such are a heavily negotiated and key components of any transaction. When observed from the perspective of the owners of a family-owned business, these statements can complicate deal negotiations as personal ties often blur the lines between business and family life.

If the R&W in a purchase agreement or merger agreement prove to be untrue (or, put another way, are ‘breached’), the consequences may be severe and could potentially implicate the withholding of funds otherwise available to the families (in the form of an escrow agreement) and have an adverse impact on the buyer’s investment model. In these situations, RWI acts as a safety net, protecting both the buyer and the seller. In family-owned businesses, RWI can offer a range of benefits, including:

• Preserving family relationships: One of the most significant advantages of RWI in family-owned businesses is its ability to prevent disputes and conflicts between family members. When it comes to making statements about the business to the buyer, family members who are less involved in the day-to-day operations might question why they are required to stand behind detailed R&W regarding the business’ operations. Further, if a breach of R&W ends up causing an adverse economic impact to the business and/or to the buyer (and requiring a release of an escrow to the buyer), this financial impact can strain relationships within a family. Using RWI can ease negotiation around the R&W in a purchase agreement and, in the event of a breach, may preserve family relationships by allowing the buyer to deal directly with an insurance company rather than seeking recourse against the seller family members.
• Enhancing deal execution: RWI increases the confidence of both buyers and sellers in the deal by allowing the parties to focus on more critical business and deal issues that exist outside of the R&W in the purchase or merger agreement. In addition, traditional seller indemnity provisions in purchase agreements required significant time and expense to draft and negotiate — RWI largely removes the need to negotiate such provisions, which frees up buyer’s time and reduces the legal spend on an M&A deal.
• Protecting family wealth: Family-owned businesses are often the culmination of generations of hard work. RWI can protect the family's wealth and assets in the event of a post-closing breach of the R&W by eliminating the need for a seller indemnity construct, reducing post-closing contingent risk and providing a buyer with an alternate source of recourse from a creditworthy insurance company.
• Simplifying dispute resolution: In the unfortunate event that a post-closing dispute arises between the buyer and seller involving a breach of the R&W, RWI can streamline the resolution process. Instead of the parties getting bogged down in litigation, they can turn to the RWI policy to seek compensation, keeping matters business-focused and devoid of any personal involvement.
• Facilitating business growth: RWI can also encourage family-owned businesses to consider growth opportunities that might have otherwise been too risky. Knowing that there is insurance to cover unforeseen liabilities can embolden these businesses to pursue M&A transactions they might have shied away from in the past.

Conclusion

AT WTW, we understand the dynamics of these operations and successfully help our clients navigate the process by bringing dedicated support and availability, as well as hands-on experience in the Latin American M&A landscape.

In the complex world of family-owned businesses, representations and warranties insurance can be a valuable tool for managing risks and optimizing outcomes in M&A transactions. RWI can protect family wealth, preserve relationships, and promote business growth while offering a safety net for both buyers and sellers. By doing so, families can continue to thrive and grow their businesses while safeguarding their personal interests in a complex and dynamic business environment.

Disclaimer

Willis Towers Watson 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, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).