Four Key Steps to Ensure a Buyer’s TSA Success
As companies develop long-term business strategies, they typically target a mix of organic and inorganic growth to maximize customer and market penetration. Acquisitions can provide an accelerated path to growth and increased market share, but each transaction involves discrete challenges to successful execution. Regardless of the specific course a company pursues, being prepared throughout the course of the purchase and sale agreement (PSA) to ensure that core capabilities are maintained for business continuity is crucial to overall deal success. As a buyer prepares to acquire, thoughtfully negotiating and managing the transition service agreement (TSA) ensures that the buyer benefits from shared services that the seller is obligated to provide in return for financial incentives offered by the buyer. This gives the buyer ample yet finite time to plan and stand up new operating processes and procedures across sales and marketing, supply chain, finance and accounting, IT, human resources, and other corporate functions.
Here are four things buyers must do to maximize value in the time allotted under the TSA and ensure high returns on the overall transition.
By performing ample diligence regarding services and costs, clearly defining the future state, and negotiating the TSA and governance structure to manage transition progress, buyers can maximize the value achieved over the course of the TSA period.
Design a future-state operating model
When a buyer identifies an interesting acquisition opportunity, it must first understand and define how the new capability or entity will support the go-forward strategy. This strategic summary, or investment thesis, defines what the future state organization will look like and sets the objectives that must be achieved to successfully execute the transaction.
Operating model decisions are paramount to TSA strategy success. Input from sellers during the diligence period influence operating model design decisions that buyers make throughout the planning stage. This can include such critical decisions as governance structure and leverage model, technology requirements, core processes for implementation, and reporting capabilities that allow for the buyer to measure both operational and financial success post-close.
Once finalized, buyers should incorporate the future state operating model into its plan for negotiating the TSA with sellers. Accounting for desired future state considerations in TSA planning and negotiation ensures that buyers can maximize the value received over the course of the transition period in the most efficient manner by focusing on functional area support critical to the future state organization.
Define services and timeline
Buyers should engage sellers early to define the supporting services that will be provided during the transition period and determine which functions are needed and for how long. To accomplish this, buyers should perform their own diligence process to understand which functions are essential, how those functions will operate, and who is needed to operate them. Most buyers will start with the necessary back-office functional areas: finance and accounting, IT, human resources, sales and marketing, and supply chain and operations.
Buyers should approach the TSA from two angles. Understanding the time needed to implement core and ancillary systems allows buyers to be more informed as they negotiate with sellers. Second, determining the time required to design, implement and train employees on integral activities, such as core accounting and supply chain processes, will affect the overall timeline of transition. Additionally, insights gained from employees through access to testing and training will directly inform the amount of transition time buyers need to request from sellers and will enable the buyer to build an implementation plan with distinct separation milestones.
Ensuring IT, human capital, and process support needs are captured as transition requirements will prepare buyers to negotiate the service period.
Understand TSA costs
Once buyers determine their make-or-break services, understand implementation timelines, and design a robust operating model, they will be better positioned to negotiate with sellers. Defining what’s needed and for how long directly affects what buyers will pay sellers for their continued support. As a result, buyers must be critical and exact in their stand-up planning to minimize costs and maximize TSA value.
Along with pass-through cost of operations, sellers may include administration fees that represent the burden of operations on the buyers’ behalf. Additionally, most sellers will include clauses related to TSA extensions that will progressively increase the cost of services rendered if TSA milestones are not hit. Buyers are incentivized to adhere to strict timelines for standing up specific elements of the organization, outlined during the TSA planning phase, to avoid increased bill-back costs.
As buyers negotiate, it is important to model the cost of the TSA compared to the expected revenue and estimated cost of the additional integrating activities related to implementing systems, designing new processes, and hiring additional employees. Reviewing costs holistically will allow buyers to better understand the cost of the transition period and forecast when the business will recover costs incurred for standup. Rigorously forecasting payments and promptly paying sellers ensures that the buyer remains in compliance with TSA terms.
Implement a governance structure
Buyers have a vested interest in maintaining TSA timelines and structure to avoid incurring incremental fees and losing out on value from the transition period. Additionally, buyers must ensure that all required post-close support capabilities have been accounted for in the TSA, otherwise they risk the ability to maintain continuity of business functions. As a result, buyers should implement a TSA governance structure in collaboration with sellers prior to close.
Ensuring that all parties are involved in TSA planning to prepare for negotiations allows the buyer to represent all necessary areas of the future organization. Through the creation of a program management office (PMO) with the seller, the buyer can maintain materials related to diligence in a data room, assign roles and responsibilities by functional area to key owners, and establish the groundwork for the post-close separation project plan. Each functional area owner will support the buyer’s overall negotiation efforts while allowing for cross-functional collaboration during planning. Additionally, tracking risks identified during TSA diligence allows for buyers to more appropriately understand expectations of seller services and service level agreements post-close, and craft future separation plans accordingly. The PMO acts as the referee where jointly defined escalation processes can be triggered in the event of disagreement.
As with almost all business transformations, maintaining employee communication is critical to the success of the TSA. The PMO, with input from key functional leaders, should develop a change and communication strategy to ensure that the buyer is set up to successfully retain key talent, transition core capabilities, and maintain overall morale and culture.
Ultimately, the preparation and negotiation of the TSA will determine whether buyers are starting off on positive footing as they begin the integration process. By performing ample diligence regarding services and costs, clearly defining the future state, and negotiating the TSA and governance structure to manage transition progress, buyers can maximize the value achieved over the course of the TSA period.
