Structuring Transitional Service Agreements (TSAs) for Success

Transitional Service Agreements are a necessary and often painful part of carve-out divestitures. The pain can be mitigated by thoughtfully separating key functions and systems of the entity being divested ahead of the deal close.

Transitional Service Agreements: Who needs them?

Simply put, everyone involved in a “carve-out” scenario does. When only a portion of a business is being divested and acquired, Transitional Service Agreements (“TSAs”) are integral to meeting both the seller’s and the buyer’s needs. That said, TSAs are born from necessity and neither party really wants them. As a result, both parties often end up being unhappy. Buyers want sellers to provide information and services to facilitate a quick integration, yet do not always receive sufficient help from the seller. Sellers expect to provide a minimal level of support for the divestiture, and buyers may be asking for a lot while sellers are trying to move on and get back to business as usual.

Strategies for Streamlining TSA Requirements

Over the years, we at The Avanti Group have worked on both sides of deals with TSAs. In our experience, the best way to facilitate an effective carve-out is by making it as straightforward and efficient as possible. We advise designing the TSA with a limited scope and a short duration. The less ground that is covered by a TSA, the less room there will be for unproductive angst between the parties after the deal has closed.

The seller has the most control over what they are selling, and thus understands and controls the majority of what the TSA will ultimately require. They also have an opportunity to apply some “tweaks” to isolate their carved-out entity, making it as independent from the parent corporate entity as possible ahead of the deal close.  While this may increase costs at the beginning of the process, it prevents headaches and lost opportunities later.  How do we recommend going about this?  Look at your carved out entity as if it were a stand-alone business and determine where it is not operating as one. Identify what adjustments are required to make it function as a stand-alone business to whatever extent possible while still part of the parent.

Simplify TSAs by Separating Business Functions

Some business processes are more challenging than others to separate, particularly corporate services provided by a Global Business Services organization like HR, IT, Finance, or Procurement.  It’s not usually easy to find opportunities in these areas. For example, a function like Accounts Payable is likely to be performed by the corporate parent. One option is to stand up a new dedicated team in the entity being sold, eliminating the need for a transition at the time of sale. The buyer, post-integration, can migrate to their own Global Business Services at a later time. In the meantime, the function is made ‘complete’ and separable as a standalone function.  Any such functions that can be transitioned to full ownership within the entity being divested will simplify the process for both parties when the deal closes.

Examples from a Recent Divestiture Project

Following are some examples from a recent divestiture project where our team was hired by the seller. The team identified several opportunities to transition services in finance, engineering and supply chain to the local entity being divested. Within IT, there were several global solutions that are not usually easy to separate; areas like infrastructure/networks, ERP, and run support. 

Fortunately, on this project, IT leadership was engaged early enough in the divestment discussions that we were able to attack the problem more strategically than usual.  Taking advantage of the time, we were able to be quite proactive. We identified options to split apart some of these areas that were previously global solutions, enabling a greatly simplified TSA.

For ERP, a carve out ERP system was created, in essence a full copy with a limited set of data.  The system was deployed in the cloud under a separate account, with a dedicated, outsourced support team. This eliminated the need to create a complicated fence within the ERP to restrict access to sensitive financial information by conveying employees.

In R&D, the divested business used a lot of specialized engineering software. Here, a TSA simply could not be avoided. It was necessary to cover both licensing and support, while the buyer acquired the appropriate licensing and expertise for installation and support.

On the infrastructure side, we were able to work creatively and perform separation activities that dramatically reduced the need for TSA coverage post-close. The team moved servers to a new cloud account, separated the network, and implemented a new Active Directory domain with a 2-way trust.  At close they deleted the trust and (mostly) disconnected from the parent company’s network infrastructure, apart from some dedicated VPN tunnels. There are important security benefits to this approach by limiting access in a tightly controlled manner. The effort was not without complexity, as production lines running 24 hours 7 days per week had to be migrated to the new domain.  Where needed, the client also converted to local licensing for desktop applications.

With those changes implemented, the IT TSA was left with simplified needs:

• ERP

• Licensing

• Minimal hypercare consulting as support transitioned to the buyer

• Data extracts for buyer’s ERP setup

• Engineering Software: licensing and support

• Infrastructure

  • A brief period of transitional deskside support

  • Microsoft licensing

  • Advisory services related to network, cloud hosting and cybersecurity

Closing Thoughts

Another important consideration is TSA pricing. While there’s no need to turn IT into a profit center, make sure not to under charge for these services. Use a time & materials based approach where possible, where the goal is to break even on these services. That said, to reiterate an earlier point, it’s important to encourage the Buyer to become independent, so the seller can move forward with their own strategic priorities.

Please contact us to discuss how The Avanti Group can help structure Transitional Service Agreements and provide leadership for your carve-out divestiture or acquisition.