Why TSA secure the M&A Deal
In an M&A deal or divestment, the main focus is on the purchase and contract negotiations. Often not enough importance is attached to considering the time after closing. But it should!
TSA are the instructions for use of the deal
The time span between the conclusion of the contract and the separation or integration of the company (part of the company) is usually regulated by Transition Service Agreements (TSA).
Such TSAs are concluded between buyer and seller. They are intended to ensure that business operations continue smoothly after Day1 and that the companies or parts of companies are separated cleanly.
These agreements contain services and know-how. The seller makes them available to the buyer for a limited period of time. The content of the TSA includes the maintenance of the administrative processes (such as accounting or HR) as well as the management of the infrastructure and applications, which must be contractually agreed upon.
While TSAs tend to appear administrative, they often have strategic consequences for both buyer and seller. Those who do not devote enough time to a TSA increase the risk of spending too much money. However, the TSA contract must be considered separately from the purchase contract.
Conflict between buyer & seller interests
The sellers usually want to keep the number of TSAs as low as possible, but the duration of the liability as short as possible.
The majority of sellers sell the business so that they can finance or focus on another part of their business. From their perspective, TSAs can become a nuisance and a distraction from achieving this goal.
In addition, most sellers have little experience or interest in providing professional services to other businesses. On the other hand, the buyer uses TSA to achieve a smooth Day1 or difficult integration with as little risk as possible.
TSA negotiation at a glance
Transition Service Agreements must be negotiated individually for each M&A deal depending on the situation. TSA can therefore lead to great difficulties if the contents are not sufficiently defined. If TSAs are not sufficiently defined, disputes between buyer and seller usually arise and consequently expensive renegotiations are necessary.
However, it is unlikely that buyer and seller can predict every possible event, so that mostly only general agreements can be made. The process of a TSA negotiation usually proceeds as follows:
- Identify and sketch TSA
- Coordination of the TSA with the legal department of the seller and update of the TSA if necessary.
- Coordination of the TSA with the buyer's legal department and update of the TSA if necessary
- Finalization of the TSA and signature of both parties
The following key points should be fully defined and contractually recorded by the contracting parties:
- Scope of services to be provided by the seller
- Additional costs for services outside the scope of application
- accounting modalities
- The duration of the agreement and all available renewal conditions
Shaping the transition
By signing the TSA, the seller undertakes to maintain the corporate functions set out in the contract. During the transition, the divested business will receive support from the selling organization.
During the period in which business operations are to continue without interruption, the new company is working on fully integrating the purchased part. The aim is to be able to work independently as quickly as possible and to take over the entire management of the company.
The TSA transition phase is usually as follows:
- Regular monitoring of the TSA
- Collection of the accrued warranties by the buyer
- The seller solves the problems that have arisen.
- Final review and termination of TSA obligations by the Parties
Getting the consultant on board
GAMBIT Consulting recommends a clearly defined transitional arrangement between buyer and seller.
The scope, the pricing and the duration of the TSA must necessarily be defined early in the M&A process (during the due diligence) in order to avoid unwanted surprises in the further process.
Ensuring a smooth transition ensures that both the buyer and the seller can meet the schedule and budget.
Meinolf Schäfer, Senior Director Sales & MarketingDo you have any questions? I will be glad to help you.
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