First, let`s understand what a Transition Service Agreement (TSA) really is. To quote “divestopedia”; Think of it this way: an ASD supposedly says, “Seller, you`re going to help the buyer for a while.” But what kind of “help” does the seller have? Here are some considerations to better understand how much time and effort should be invested in planning for ASD. Please understand that ASD is extremely unique to the situation. OK, easy, right? But as with any legal agreement, their quality depends on the effort you put into them. And as TSA becomes an important transition project document, it helps to spend enough time planning for TSA, taking into account the following: Because of the time and resources often required to complete ASD, parties should determine at the outset whether ASD is warranted. Not all transactions require TSA: the layout revolves around the networking of the seller and the target company, as well as the particular skills of each party. For example, will the divestiture result in the buyer acquiring all assets (systems, service contracts, licenses, etc.) necessary to complete the target transaction (i.e., the “clean-break” scenario)? If so, is the buyer confident that they will be able to manage the sold business without the seller`s help? Will the seller also be able to operate his remaining business without assets or assistance from the divested business? If the answer to these questions is yes, ASD may not be required. However, if one party needs assets or support from the other party after closing, TSA is required. When a company decides to acquire or divest, there are many issues to consider. Too often, the parties neglect until the end of the process whether services are to be provided after completion under a transitional services agreement (CSE). This article discusses the general context in which ASD is required and provides guidance for starting to collect and analyze TSA requirements to avoid unnecessary transaction costs, delays, and inefficiencies. Often, the seller has to rely on its own suppliers and service providers to provide services to the business after closing.
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 Seller`s 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 influence and little incentive to provide short-term or transitional services). The development of a Transitional Services Agreement (CST) is a common step in the M&A process. Although ASD is routine, it is still complicated, time-consuming, and not always well received by a buyer or seller. A transitional service agreement (TSA) is entered into between a buyer and a seller, in which the seller is required to provide infrastructure support such as accounting, IT, and human resources once the transaction is complete. 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. 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 transitional services agreement and the criticality of the services provided, ASDs can range from short back-office management service contracts with an agreement to set fees in the future and without formal performance standards to full service agreements with defined scope, service levels, variable fee agreements and detailed data security and confidentiality regulations. For any M&A transaction involving a transition services component, it is the responsibility of both buyer and seller to reach agreement on certain important considerations prior to the closing of 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 main issues to consider when negotiating and developing an ASD. A diversified industrial company sold companies in its portfolio.
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 would be expected of a buyer and what the seller would be willing to provide, and specific data elements were collected to help the customer determine prices and service levels. For example, in back-office processes, KPIs were collected and estimates of FTEs needed to support processes were created. The high-level benchmarking allowed the client to determine how long it would take for a buyer to replace the services (i.e. Through outsourcing) and how long it takes the customer to reduce stranded costs. Scope, duration and SLAs were documented in the service plans that the client used as a starting point for their assignment work. By working with functional teams, the company determined which services it would not provide and which services would be difficult to provide. The interconnection exercise led to potential measures that the customer was prepared to take with a view to future restructuring and divestiture.
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. An effective program governance structure can help organizations quickly assess and resolve TSA-related issues. It will enable the integration officer to make operational decisions consistent with tsa program guiding principles. The governance structure is operational at all stages of TSA – framing, negotiation, and execution – and the right teams must be in place to assess service level agreements, TSA pricing, and payments between the two companies. The allocation of liabilities often follows leverage and the allocation of liabilities in major acquisition documents. Careful consideration should be given to whether and to what extent the seller is responsible for the failures of its own third-party contractors. It is common for an TSA to include a waiver of consequential damages (i.e., consequential damages, penalties, depreciation, etc.) and individual and aggregate limits on direct damages. Consider reasonable exclusions from such waivers and limits, such as. B, breaches of confidentiality, gross negligence, wilful misconduct, violations and misappropriation of funds. TSA vs Outsourcing AgreementsBADs as well as outsourcing agreements typically involve one party providing services to the other that may be critical to the operation of the service recipient`s business. However, a key difference with ASD is that the seller (as a service provider) is usually not in the business of providing these services.
In addition, the seller`s IT organization may not have the industry-standard discipline and processes of professional subcontractors. Similarly, the degree of customization of the service in the context of a TSA is generally more limited than in an outsourcing contract, especially if the seller uses the same systems to serve the buyer and the company retained by the seller. For these reasons, Seller may only be willing to commit to providing the TSA Services in the same manner as it provides similar services to itself. 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. An ASD is a fairly accurate business example of real-life events: Mom and Dad help with their son`s expenses during the first few months he works, but very quickly he is able to take care of everything on his own. It`s not that ASD is complex at first glance; but that`s what`s in the TSA deal that comes with plenty of potential headaches and hiccups. The comments and questions below better represent “things to ask yourself”, not “this is what you need to do to have successful ASD” – aside from the fact that everyone involved should be communicated and, of course, the deal should be very well detailed.
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