You may be walking into your first M&A transaction and you don’t want to step on any landmines, not an unfamiliar scenario for many people. Purchasing part of another company is a complicated endeavor that has the potential to create substantial opportunities, but only if the transaction goes smoothly. That’s where Transition Service Agreements (TSAs) come into the picture:
When a portion of an organization (usually referred to as a carve-out), is sold to another company, a TSA is used to codify the agreement in which the seller agrees to provide services to the buyer to ensure a smooth and orderly administrative transition.
Here are a couple of examples of the services that would be detailed in a TSA:
- Payroll Administration – continuing to process payroll in the seller’s systems to ensure the uninterrupted delivery of paychecks while the buyer incorporates the new entity into their own payroll systems
- Email – Since setting up all the new employees in the buyer’s systems often takes more time than is typically available between sign and close, the seller keeps carve-out personnel on their email systems until the buyer can execute a smooth cutover post-close
I recently listened in on a colleague’s TSA management call. After an hour of discussions into which almost every one of the 15 attendees had input, this is what came out at the end:
- One success
- Three governance mishaps
- One misunderstood change request
Even though the deal closed over three months earlier, both parties could not agree on the interpretation of the TSA: This is a common result of poorly written TSAs and can result in a waste of time and money.
Even a well-run TSA management operation will have a certain amount of tension; it is a normal extension of the reality of the situation: you have two companies on opposite sides of the same conversation, one trying to get as much as they can for their fixed TSA fees, and the other trying to expend as little effort as possible while meeting their contractual obligations. The goal of this article is to help everyone understand how critical it is to ensure that the tension stays at that normal level, because the alternative gets very expensive, very quickly.
A problem that many firms inadvertently create for themselves comes from not correctly anticipating the dynamics of the working relationship:
Understand that TSAs are a zero-sum game because the buyer and seller’s interests are not mutual.
In a zero-sum game, one can only gain an advantage at the expense of the other, a situation that inherently creates an adversarial environment. Moderating the expected conflict requires a great deal of upfront effort on both sides to put as much detail into the TSAs as possible. This includes clear language on what is being provided, by whom, the systems involved, under what specific circumstances the TSA can be exited, and how dispute resolution will work.
How can you proactively remove as much tension from the process as possible? Understand the other side’s point of view and take it into account when you make your own proposals.
The following chart lays out the motivations you might expect from your counterparts at the negotiating table, not so you can take advantage of them (which will create unneeded strain during the term of the TSA), but so you are best equipped to reach an equitable agreement.
Now, how do you take this knowledge and tactically apply it to your situation? Click here for our detailed thought piece on Writing TSAs.