When a business is sold or divested, the seller often enters into a Transition Services Agreement (TSA) with the buyer. TSAs impose obligations on the seller to provide services to the buyer to ensure the acquired business can operate without undue interruption between closing, post-closing, and complete separation. A previous post on this blog discussed key issues the buyer must consider when negotiating a TSA. While these issues remain relevant to the seller, there are additional strategic considerations it should take into account to ensure value is not left on the table.

Accenture published a report identifying six leading practices sellers should engage in to optimize value and minimize business disruptions when negotiating TSAs in M&A transactions:

1. Think about getting out, before getting in 

The seller should first determine the outcome it hopes to achieve from the TSA and the timeframe it anticipates will be necessary to do so. More specifically, it is important the seller considers the services it is willing to offer and the length of time for which it will be able to offer them. In essence, the seller should consider how to get out of the TSA before entering into it.  To establish the necessary scope and duration of the TSA, the seller should articulate the transitional services the buyer will need versus those the buyer will simply accept. By doing so, the seller will help ensure it does not unwittingly incur unnecessary costs associated with extending services that are of little value to the buyer.

2. Focus on TSAs early

It is important that the seller begins work on the TSA early in the transaction. Although TSA negotiations are commonly left to the period between signing and closing, beginning the process earlier has the advantage of allowing the seller to negotiate the TSA in conjunction with the Purchase and Sale Agreement (PSA). Not only will this let the seller to use the TSA as leverage in the PSA negotiations, it will also allow the seller to prepare its post-close activities well in advance.

3. Dedicate a separate work stream to manage the TSA process 

Developing an effective TSA involves a complex process that requires the cooperation of many stakeholders and the completion of a wide variety of tasks. By establishing a dedicated work stream to manage the TSA, the seller can standardize its development process while maintaining flexibility to re-scope the agreement if necessary.

4. Minimize stranded costs 

The seller should evaluate and document the true costs of the services and take steps to minimize any stranded costs. Stranded costs are those which the seller incurs due to its inability to adjust its own cost structure to account for the transition services that will be provided to the buyer. For instance, in the circumstance where a seller divests part of its business, its company-wide support services may be too large when the divestiture leaves. It is therefore important that the seller anticipate such stranded costs and develop a plan to ensure accurate cost pass-through in the transition of the services.

5. Tightly manage negotiations

It is important for the seller to adhere to a timeline in its negotiation of the TSA. This timeline should allow for the negotiation of the TSA wind-down schedule. Following a negotiated wind-down timeline can mitigate the seller’s risk of incurring stranded costs and any ongoing expectations of service provision.

6. Implement robust “post-close” service governance policies 

The seller should negotiate post-close governance policies and a dispute resolution process to ensure the wind-down schedule is effectively executed. The seller may consider assigning a dedicated manager to monitor this process and to make adjustments as necessary.

By implementing these leading practices, sellers can facilitate smooth transitions and realize optimal value in M&A transactions.

The author would like to thank Robyn McLaren, articling student, for her assistance in preparing this legal update.

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