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 period between the conclusion of the contract and the separation or integration of the company (part) is usually regulated by Transition Service Agreements (TSA). TSAs are entered into between buyer and seller to ensure that business operations can continue smoothly after Day1 and a clean separation can be achieved.

These agreements contain services and know-how which are made available to the buyer by the seller for a limited period of time. The content of the TSA includes the maintenance of administrative processes such as accounting or HR, as well as the administration of the infrastructure and applications, which must be contractually recorded.

While TSAs tend to appear administrative, they often have strategic consequences for buyers and sellers. Not paying enough attention to TSA increases the risk of money being thrown out of the window. However, the TSA contract must be considered separately from that of the sales contract.

Conflict between buyer & seller interests

The sellers usually want to keep the number of TSAs as low as possible and the duration of liability as short as possible. The majority of sellers sell the business so that they can finance or concentrate on another part of their business. From their perspective, the TSA 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 realize a smooth Day1 or a difficult integration with minimal risk.

TSA negotiation at a glance

Transition Service Agreements must be negotiated individually for each M&A deal, depending on the situation. TSAs can therefore lead to major difficulties if the content is not sufficiently defined. Insufficiently developed TSAs usually lead to disputes between buyer and seller and consequently to expensive renegotiations.

However, it is unlikely that buyers and sellers will be able to predict any possible event, so that in most cases only general agreements can be reached. The process of a TSA negotiation is usually as follows:

  1. Identify and sketch TSA
  2. Coordination of the TSA with the legal department of the seller and update of the TSA if necessary.
  3. Coordination of the TSA with the buyer's legal department and update of the TSA if necessary
  4. Finalization of the TSA and signature of both parties

The following key points should be fully defined and contracted:

  • 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
  • liability

Shaping the transition

By signing the TSA, the seller undertakes to maintain the corporate functions set out in the contract. During the transition, the division to be spun off receives support from the selling organization.

During the period in which business operations are to continue without interruption, the new company will work on fully integrating the purchased part in order 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, pricing and duration of the TSA must be defined early in the M&A process, during due diligence, in order to avoid unwanted surprises in the further process.

Ensuring a smooth transition ensures that both buyers and sellers can meet their schedules and budgets.

Meinolf Schaefer01 1444x1444px

Meinolf Schäfer, Senior Director Sales & Marketing

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