During a carve-out or divestiture, the majority of the seller’s focus is on negotiating the purchase and sale agreement (PSA) and valuation considerations. Often, there’s one area that doesn’t get the attention till it’s too late: the transitional service agreement (TSA). In our experience, paying sufficient attention to TSA’s decreases the risk that players will…
During a carve-out or divestiture, the majority of the seller’s focus is on negotiating the purchase and sale agreement (PSA) and valuation considerations.
Often, there’s one area that doesn’t get the attention till it’s too late: the transitional service agreement (TSA). In our experience, paying sufficient attention to TSA’s decreases the risk that players will leave value on the table or that there will be a disruption to the seller’s business on Day One and beyond.
RGP has identified five practical, leading practices for sellers:
1. Develop a Perspective Early on What TSA’s You’re Willing to Offer the Buyer
Start with the end in mind. Know how to exit a TSA before agreeing to a number of services to get the deal done. We recommend doing a thorough seller due diligence early to understand which services the Seller will provide to the business that’s being sold and assess their ability to continue providing services at the current levels. The mindset we recommend is that TSAs are used as a last resort for services that cannot be discontinued, outsourced, replicated or transitioned to the buyer or third-party vendor prior to the transaction close.
2. Develop a Robust but Flexible TSA Framework
Frame the TSA into multiple parts where each part could be terminated individually. TSA services that are linked should be explicitly laid out—it should be clear which sections are severable. Include a section for excluded services (that will not be rendered during the TSA period). This will facilitate analysis and planning for Day One.
3. Dedicate a TSA Workstream Early in the Deal Process
Appoint a TSA lead who can drive your TSA process and work with different stakeholders including the deal team, business operations, the legal and deal advisors, and the team that’s responsible for executing the separation. This enables a standardized approach to developing TSAs across all of the functions and allows for a better cross-functional understanding between services and functions.
The TSA lead should manage this process closely; service receivers and providers should draft TSA schedules, not attorneys.
4. Capture all Costs and Price to Incent the Buyer to Exit as Quickly as Possible
Pricing for the TSA should be linked to the specific service. Start with the services identified vs. a wholesale price for a function. Costs include headcount, non-headcount (including third-party costs if critical to the seller delivering the service), one-time costs (e.g. acquiring additional servers, firewall set-up). Include a “catch-all,” which allows for additional services on a per-hour basis. The service period typically ranges between six months and two years, depending on the service. When developing service schedules, make sure to identify interdependencies and factor them into the exit planning for TSAs—the management of stranded costs, for example. Put in the appropriate escalators so that the buyer can wean off the TSAs as quickly as possible.
5. Establish the Right Post-Close Processes
Prior to Close, it’s important to define a governance structure to enable the Seller and buyer to manage the delivery of TSA services seamlessly. This ensures clarity of responsibilities and accountabilities for key players in the TSA ecosystem. Develop a set of easy-to-use tools which promote effective status reporting, issue management, change control, along with billing and accounting.
RGP’s approach to TSAs played an important role in helping a $2 billion leading global designer, manufacturer and marketer of consumer products in its business transformation. RGP helped our client carve out and sell three brands as one company to a private equity buyer within a compressed timeline.
This complex transaction involved 18 shared global locations, six legal entities and multiple customer channels. We supported the company by identifying, costing and providing post-Close governance tools for 110+ transition services (forward and reverse) across eight functions. This enabled them to complete the transaction with confidence and minimal disruption to their core business.
This international client partnered with us to assess their impact, develop winning plans, and implement tailored lease accounting solutions – and we can help you too! Contact us to learn more.
The post was orignally published by the Technology Association of Oregon.