The comments and questions below better represent „things to ask yourself“, not „this is what you need to do to have successful ASD“ – apart from the fact that each participant must be communicated and that the agreement must of course be very well detailed. Parties to an ASD should understand whether there is any personally identifiable information related to the Health Insurance Portability and Liability Act or other sensitive or confidential information used in connection with the services provided. If this is the case, you should consider implementing appropriate safeguards for buyers and sellers, as well as their respective employees and contractors. A Transition Services Agreement (TSA) is between a buyer and seller and provides for the seller to provide infrastructure support such as accounting, IT, and human resources at the end of the transaction. TSA is common in situations where the buyer does not have the management or systems to absorb the acquisition, and the seller can offer it for a fee. Transitional provisions on services can be extremely difficult to manage if they are not properly defined. Typically, poorly worded ASD leads to disputes between buyer and seller, focusing on the extent of the services to be provided. Buyers and sellers must agree on clearly formulated and objective pricing conditions. Unit prices, NRE hourly rates, deliveryability testing and acceptance procedures, transition times and staggered milestones are useful mechanisms to make pricing conditions as objective as possible. It is important that the buyer has the opportunity to extend the duration of the TSA with agreed price increases for the renewal terms. A consumer goods company acquired a large spice company that was separated from its parent company.
To ensure business continuity during the transition period, TSA services were established, but the length of service was limited to only six months. Transitional services arrangements are common when a large company sells one of its business units or certain non-core assets to a less demanding buyer or to a newly created company where senior management is in place but the back-office infrastructure has not yet been built. They can also be used in „carve-outs“, where a large company has split a department into a separate public company and then offers the infrastructure services for a defined period of time. It is common for ASDs to include arbitration clauses or clauses that require the parties to take legal action if there are major issues with continuity of service. However, a buyer may not want to invest the time and resources to comply with these traditional dispute resolution options for anything other than the most egregious mistakes. Consider including escalation clauses that allow the service provider`s internal representatives and the recipient of the service to resolve continuity issues amicably. Determine if advanced business continuity or disaster recovery plans are needed. From our most recent perspective, „Fast Break – A Way to Design and Manage TSAs to Achieve a Quick and Clean Separation,“ Indira Gillingham, Senior Manager, and Mike Stimpson, Manager at Deloitte Consulting LLP, give practical advice on how to use ASD to achieve a quick and clean separation. An TSA can speed up the negotiation process and financial close by letting the transaction move forward without waiting for the buyer to take responsibility for all critical support services. A diversified industrial company has divested itself of its portfolio activities. Companies tended to be highly centralized and used a shared service desk for back office, IT, human resources, and purchasing.
The companies` business activities also mixed sales and production. KPMG was tasked with helping the client identify entanglements and develop a 1-day operating model for „a typical portfolio asset.“ This first exercise was the model for determining what a buyer would replace and what the seller would be willing to offer, and specific data elements were collected to help the customer determine prices and service levels. In back-office processes, for example, KPIs were collected and estimates of FTEs needed to support the processes were created. The high-level benchmarking allowed the client to determine how long it would take a buyer to replace the services (i.e. via outsourcing) and how long the client should reduce lost costs. Scope, duration and SLAs were documented in the service plans that the client used as a starting point for its divestiture work. By working with functional teams, the company determined which services it would not provide and which services would be difficult to provide. The entanglement led to possible actions that the client was willing to take as future restructurings and divestitures approached. At the end of the fiscal year, the client`s team worked with members of the company`s development team to develop a common understanding of the trade-offs between tsa`s different options. Understand buyer`s review and audit requirements, including whether additional review and audit rights are required from seller`s own suppliers and service providers.
While general audit rights are common in TSA, you need to determine whether specific audit rights are required for the recipient of the service, regulators, or other third parties for the recipient of the service to comply with its own policies or legal/regulatory obligations. The company, with the support of kpMG, quickly developed an entire TSA program management team and a rigorous governance process with the vendor to facilitate communication, resolve issues, and manage change requests. The company was able to exit TSA services in several regions in a timely manner and avoid any disruption to operations. Effective communication ensured coordination between buyer and seller and allowed for timely resolution of issues. The focus on exit planning contributed to the early termination of some TSA services, resulting in significant cost savings. If a company is sold as part of a merger and acquisition transaction and the seller is expected to continue to provide services in support of the post-closing entity, the parties to the transaction enter into a transition services agreement (TSA) that governs the provision of those services to the post-closing entity. Depending on the complexity of the transition service agreement and the criticality of the services provided, ASAs can range from short back-office management service contracts with an agreement to set fees in the future and without formal performance standards to comprehensive service agreements of defined scope, service levels, variable fee agreements and detailed data security and confidentiality provisions. For any M&A transaction that includes a transition services component, it is the responsibility of the buyer and seller to reach an agreement on certain important considerations before entering into the M&A transaction. These considerations should be negotiated by the TSA parties as early as possible in the process, ideally during the due diligence phase.
Here are the most important aspects to consider when negotiating and developing an ASD. Drafting and managing transition service contracts to achieve a quick and clean separation has been stored A transition service contract (TSA) is an agreement between a buyer and a seller in which the seller contracts with the buyer its services and know-how for a specified period of time to help the buyer and allow him to get used to his newly acquired assets. Infrastructure, systems, etc. Service levels should be defined in tsa or supporting documentation with the right level of detail so that parties can understand exactly how the requested services are to be provided, but without giving the seller contractual „exits.“ Avoid non-compliance with „reasonable, „commercially reasonable“, „best business efforts“ and other similar performance standards that could allow seller to technically operate in accordance with the TSA, but without actually providing the requested services in a manner that provides the buyer with the benefit of its business. Often, the seller has to rely on their own suppliers and service providers to provide services to the company after graduation. Determine whether Seller has sufficient rights under its existing upstream agreements and licenses to provide the requested services itself, or whether third party agreements and licenses with vendors and service providers need to be entered into or amended. Consider the criticality and complexity of the services requested, as well as the cost and timing of entering into or amending agreements with third parties (taking into account that third parties may have significant leverage and little incentive to provide short-term or transitional services). A Transition Service Contract (TSA) offers significant benefits when used wisely, . B such as faster execution, smoother transition, lower transition costs, better end-state solutions, and clean separation. However, divestitures that make TSA wrong can take much longer than expected. What remedies are available to the buyer if the seller does not adequately comply with the TSA? A seller may have little incentive to work in accordance with the service levels set out in the TSA and its accompanying documents after closing, unless there are explicit lump sum damages that can be recovered from the buyer – standard indemnification may not provide sufficient motivation. For maximum applicability, you should consider recovering from an ESC account for underperformance under the TSA (although this can be difficult to negotiate in the context of a larger M&A transaction).
Third party consents should be identified as early as possible in the due diligence phase, as related services could take a long time for an appropriate transition. Third-party consent fees can be significant and should be considered part of the broader economic understanding of the M&A transaction. .