More companies are focusing on a rigorous Transition Service Agreement (TSA) as a critical component in creating deal value.
More companies are focusing on a rigorous Transition Service Agreement (TSA) as a critical component in creating deal value. Our extensive experience in the TSA negotiations area reveals that adhering to five leading practices—set the scope of the TSA, define service level agreements, establish the correct pricing model, structure the correct duration and preserve the relationship with your counterparty—can result in a shortened deal process and improved deal results.
Recently, a diversified industrial company looking to divest businesses in its portfolio came to us for TSA support. The company’s businesses tended to be highly centralized and used a shared service center for back office, IT, HR and purchasing. The operations of the businesses also commingled distribution and manufacturing. Below, we share how we put four of our leading practices to action for our client and explain what your M&A team needs to know. You can read the full report here.
Set the scope of the TSA
We were engaged by our client to help identify entanglements and to help develop an operating model for Day 1 for “a typical asset in the portfolio.”
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, which should include the processing and use of shared services and exclude sensitive or risk-management related functions. To reduce risks, buyers should consider drafting TSA service schedules with an entanglement mapping work stream to identify key functional areas, processes and systems with dependencies. Buyers must clearly define the current operating processes and services being provided, develop an entanglement map, and identify critical transition service gaps that the TSA needs to address.
Define service level agreements
The initial exercise of identifying entanglements enabled us to create a model for our client to determine what a buyer would be expected to replace and what the seller would be willing to provide. The company determined which services it would not provide and which services would be challenging to provide.
A TSA agreement should include a detailed description of each service level requirement, including metrics. Specific penalties for failure to perform an agreed-upon service should be detailed to protect the buyer and ensure recourse against the seller.
Establish the correct pricing model
We collected specific data elements 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.
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. A detailed pricing structure allows sellers and buyers to understand the resources needed to support services and limit unexpected fee issues.
Structure the correct duration
High-level benchmarking allowed the client to determine how long it would take a buyer to replace services 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.
Accurately analyzing and planning the development of key internal capabilities required in the 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.
For more information on TSA negotiating issues and for additional client stories that focus on the benefits of a TSA governance approach and early planning for a TSA exit, read the full report here.