Four Key Steps to Ensure a Seller’s TSA Success
When a company decides to divest a business unit from its portfolio, both the buyer and seller typically devote considerable time and effort to executing the purchase and sale agreement (PSA). As a supplement to the PSA, there are a series of interim and post-close covenants which often incorporate transition services agreements (TSA) for key functional support while the carved-out entity prepares to operate on a standalone basis. A TSA should be developed and executed in parallel with the PSA as it is critical to the success of a transition and details the agreed-upon functional support and shared services required for the buyer to operate post-close. The agreement also indicates that it will be maintained for an agreed-upon period by the seller’s organization. This support may include functions such as sales and marketing, finance and accounting, tax, human resources, IT, supply chain, or operations.
Here are four key things sellers can do to develop, execute, and terminate a successful TSA.
As the seller’s primary goal is to successfully transition all operations of the business onto new ownership, being able to clearly outline the services being offered through the TSA and any potential gaps will avoid prolonged reliance on the parent.
As workstreams are determined and assigned, each function must perform in-depth diligence across systems and data, processes, and employees to capture dependencies for overall functional success. Defining the critical elements of the business allows the seller to understand which services will be offered during the TSA period and the length of time those services will be offered. Once all functions have been reviewed for people, process, and system impacts, each of these elements must be designated as either a part of the future state of the company, a supporting service that will be offered to the buyer, or a service that the buyer will need to provide. In parallel, an in-depth analysis should be performed to understand the standalone cost of operating the business when separated from the parent. As the seller’s primary goal is to successfully transition all operations of the business onto new ownership, being able to clearly outline the services being offered through the TSA and any potential gaps will avoid prolonged reliance on the parent.
Determine TSA pricing
In addition to scope and timeframe, outlining detailed costs for each support area of the TSA ensures that pricing is adequate. The seller’s understanding of all costs including one-time separation costs, replacement costs, and costs to maintain the business on the buyers’ behalf is important for coming to a final agreement on how much the buyer should pay the seller for TSA services.
Sellers should assess the need to negotiate for administration fees to cover general or function-specific markups, which act as additional insurance to cover costs incurred but not directly related to TSA support (e.g., one-time separation costs). These fees may also include strict price increases should the TSA period extend beyond the initially agreed-upon timeframe.
Implement a program management office
Establishing a comprehensive governance structure before close through a program management office (PMO) is the most effective way to ensure that all relevant aspects of the business are involved in the development and execution of the TSA.
By managing the project plan throughout the TSA creation, negotiation, and transition execution, the PMO helps to preserve value for the seller through a renewed focus on core business capabilities and continuity. By defining specific functional workstreams with owners, establishing responsibilities, and building an infrastructure by which risks can be closely monitored, interfunctional dependencies can be captured and closely tracked within a transition project plan. Additionally, the PMO enables a smooth transition by creating and maintaining strict guidelines throughout the process to mitigate potential disagreements between buyer and seller.
Most importantly, the PMO must equip the management team with the right communication strategy and ensure messaging is timely and transparent. Not only must employees be informed of changes, but company culture and morale should also be maintained as a crucial element of a successful separation.
Develop a transition and wind-down approach
Having a defined strategy, governance, and an understanding of how success will be measured, sellers should then investigate the other supporting functions that will no longer be required once the transaction is complete. This can be done in parallel with due diligence and may include supporting areas such as accounting, HR, supply chain, and IT. Understanding the people, processes, and technology that are primarily dedicated to the carved-out function allows sellers to make informed reduction decisions down the line. This diligence performed leading up to the transaction close informs the specific details included in the TSA.
Understanding specific roles allocated to the carved-out entity will dictate those positions that should be eliminated or transitioned to the buyers. Performing an in-depth review of functions through process assessments, pre/post-close throughput analysis, and cost modeling enables the sellers to understand how specific back-office roles are allocated and whether these roles can be repurposed in the future. For example, the same number of employees may not need to be utilized within the supply chain and accounting functions once procurement tasks disappear and intercompany and GL accounting tasks are reduced. These resources can be redeployed within the seller’s organization or allocated to the buyer as a part of the sale.
Starting with human capital allows sellers to understand the roles of those individuals, how they are supporting the divested entity, and in what capacity their roles will change post-transaction. This gap assessment naturally extends to the processes that these individuals support, followed by the systems used in order to execute. Sellers should retire unneeded resources and retain necessary resources to ensure business continuity and success of the remaining company.
By selling a business unit, companies can yield large returns. However, without a strong transition plan that includes the development of a TSA, buyers are likely to be exposed to inefficient separation activities and stranded costs. To avoid long, drawn-out transitions and maximize transaction value, sellers must ensure their separation strategy is supported through the diligence required in order to develop and execute a TSA.