The NFL Draft takes place this year from April 25 – 27. It’s an exciting time for fans, with millions watching the telecast as players in suits are selected and hold up their new team’s jersey for the cameras… smiling from ear to ear.
The ceremony is a culmination of months, even years, of speculation by fans and commentators. And the picks could impact a franchise’s prospects for a playoff spot, even the Super Bowl, for years to come.
There are many factors that go into what player a team selects. Their performance at the college level, their stats, their physical fitness, their commitment to a team, salary requirements… but there are some other elements that don’t make it into the mainstream coverage.
Picking up a star player (or one with potential to be a star player) is a huge investment, money wise and in terms of opportunity cost. So that’s why NFL teams conduct thorough due diligence of every potential pick. They actually hire private investigators to do background checks to check for legal issues, drug problems, or whatever else could be a liability.
It’s comparable to the due diligence a Buyer does when considering acquiring a company in the M&A world. As part of that process, the financials are gone over backwards and forwards, and often Buyers will even conduct background checks on top executives to make sure they are on the level.
There is a lot on the line. A bad decision in a draft pick, and the General Manager or even the Head Coach can get fired. Make the wrong acquisition, and the CEO of the purchasing company could be fired.
Think back about 20 years ago. Tennessee starring quarterback Peyton Manning was the number one draft pick in the 1998 draft. Heisman Trophy finalist from Washington State, Ryan Leaf, was the second overall pick. There were high hopes for both. Manning, as you know had an illustrious career. Leaf… well, had a brief, lackluster career followed by drug abuse and jail time.
You can bet the teams that picked Leaf and Manning had both done extensive diligence on these players. But that research can’t uncover everything or predict every potential issue.
It’s the same during due diligence in the run up to an M&A deal. With the complexity of today’s transactions, it’s harder than ever to conduct effective and thorough due diligence… it’s easy to miss issues that could turn into a breach of representations that could result in financial damages.
Buyers in today’s competitive, fast-moving market are looking at, on average, three to four acquisitions in the coming year and are using due diligence to determine the highest “draft picks.” But, as we’ve seen, even the high picks on paper don’t always pan out.
In professional sports, the team has to eat the cost of a lackluster player and are often contractually obligated to keep paying them even with lack of performance.
Fortunately, in M&A, there is a tool Buyers can use to insulate themselves from issues that pop up post-closing. Damages resulting from a breach in a representation in the purchase sale agreement can actually be paid without hassle by a third party.
All that needs to be done is for a Representations and Warranty insurance policy to be put in place. Both Buyers and Sellers like R&W coverage because it smooths out negotiations, the Seller takes home more money at closing, and, again, the insurer will pay the Buyer if there are breaches post-closing.
This coverage is affordable and easy to get. Premium insurers will charge 2% – 4% of the policy limit. The Underwriting fee, which is $25k – $50K (depending on the size of the deal) and policy taxes are based the Buyer’s state of domicile, ranging from 3% – 7% of the premium.
It’s a small price to pay for the peace of mind. And you can bet NFL teams would love to have similar coverage in place to insure themselves against a bad pick.
I don’t know who’s going to be the top pick in this year’s NFL Draft. But I do know that as we get into the heart of 2019 and M&A activity is on track for another record year, the protection offered by R&W insurance is essential.
I’ve put together a special report outlining all the advantages of R&W insurance, as well as the process for securing this coverage. If you’re looking at acquisitions in 2019, it’s worth a close look.
You can download this report here: 8 Things You Need to Know About Representations and Warranty Insurance.