Key TSA provisions your M&A team needs to know now

These companies are negotiating TSA terms early in the deal cycle, and targeting their efforts to resolve scope and pricing issues.  In addition, acquirers can shorten the time to close by utilizing a dedicated TSA work stream, implementing effective governance teams to manage the TSA, and implementing an appropriate TSA exit plan.

Utilizing the following leading practices for negotiators can help improve your deal results.

1. Setting the scope of the TSA is crucial: As the scope of the TSA is being defined, a seller should focus on the deal perimeter and the services required to support operations on Day 1. To reduce their risk, buyers should consider drafting TSA service schedules with an entanglement mapping work stream to identify key functional areas, processes, and systems with dependencies.
   
   
2. Structuring the correct duration: One of the most important components of any TSA is its duration. Accurately analyzing and planning the development of key internal capabilities required post-TSA period is one of the most important parts of the TSA process. Doing so will ensure that companies are adequately covered during the transition period and also provide the ability to exit TSAs in the agreed upon time frame.
   
   
3. Establishing the correct pricing model: Companies need to understand and develop an appropriate fee structure for services provided. Sophisticated sellers conduct an analysis of the full economic costs related to setting up, delivering and exiting TSAs during diligence.
   
   
4. Defining the Service Level Agreement: The buyer and seller need to agree on acceptable services levels for each TSA service. A detailed description of each service level requirement, including metrics, should be documented and included in the TSA agreement. Also, specific penalties (reduced service fees, reimbursement for lost sales, etc.) for failure to perform an agreed upon service should be detailed to protect the buyer and ensure recourse against the seller.
   
   
5. Preserving a solid relationship with your counterparty: Buyers and sellers should strive to maintain a collaborative relationship, particularly in longer or more complex TSAs. If the deal process indicates that the relationship is more confrontational, then all the TSA terms need to be strictly defined, with limited room for interpretation.

Case study:

A diversified industrial company divested businesses in its portfolio. The businesses tended to be highly centralized and used a shared service center for back office, IT, HR, and purchasing. The businesses’ operations also commingled distribution and manufacturing. KPMG was engaged to help the client identify entanglements and help develop an operating model for day 1 for “a typical asset in the portfolio.” This initial exercise formed the model to determine what a buyer would be expected to replace and what the seller would be willing to provide, and specific data elements were collected to help the client determine pricing and service levels. For example, in back-office processes, KPIs were collected, and estimates of FTEs needed to support the processes were established. High-level benchmarking allowed the client to determine how long it would take a buyer to replace services (i.e., via outsourcing) and how long the client would need to mitigate stranded costs. Scope, duration, and SLAs were documented in service schedules, which the client used as a starting point for their divestiture work. By working with functional teams, the company determined which services it would not provide and which services would be challenging to provide. The entanglement exercise led to potential actions that the client was willing to undertake in advance of future restructuring and divestitures. At the conclusion of the exercise, the client team worked with members of the corporate development team to develop a common understanding of the trade-offs between different TSA options.

In addition, companies should include a TSA governance approach and plan in advance for the TSA exit.

TSA governance approach

Having an effective program governance structure can help companies quickly evaluate and remedy any TSA-related issues. It will allow the integration lead to make operational decisions aligned with the TSA program-level guiding principles. The governance structure is operational during all phases of the TSA-—scoping, negotiation, and execution—and the right teams should be in place to evaluate service level agreements, TSA pricing, and payments between the two companies.

Case study:

A governance program was a crucial component in a short TSA

A consumer products company acquired a major condiment business that was separated from its parent company. To ensure business continuity during the transition phase, TSA services were established, but the service duration was limited to only six months.

The company, assisted by KPMG, quickly developed an overall TSA program management team and a strict governance process with the seller to facilitate communication, resolve issues, and manage change requests. The company was able to transition off of the TSA services in multiple geographies within the required time frame and was able to avoid any disruptions to the business. Effective communications ensured alignment between the buyer and seller and allowed for a timely resolution of issues. A strong emphasis on exit planning contributed to early termination for some TSA services, which led to significant cost savings.

TSA exit planning

Both buyers and sellers need to agree on the activities, dependencies, and risks required to exit the TSAs in a timely and cost-effective manner and also agree on how to minimize risk to ongoing operations. Companies should aggressively manage toward exit and utilize the governance process to address any potential risks or issues. A mitigation plan should be developed to deal with any potential delays in exiting the TSA.

Case study:

Advanced TSA planning aided a complex integration effort

A global healthcare services company operating in the biopharmaceuticals and medical products segments was conducting an integration of a global business unit. The integration effort spanned over 70 countries, with varying operational structures and utilizing multiple IT systems. The challenge for the company was how to ensure a timely, regionally phased TSA exit across all regions while still maintaining global business continuity.

Having dedicated TSA work stream leaders facilitated retained knowledge throughout the deal cycle, which was critical to developing, administering, and tracking the TSA. Including key leaders from functions during the early planning process helped successfully bridge the gap between the prescriptive legal language of the TSA and the operational nuances that existed. These functional leaders participated in open discussion between companies, which helped to manage expectations, align on interpretation of terms, and minimize ambiguity.

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