Mergers and Acquisitions: What to Know before Starting a TSA
Part 1 in a 6-part Series on Transition Service Agreements and Divestitures
Mergers and Acquisitions after Covid-19: Where Are We Now?
It is undeniable that the COVID-19 pandemic has had a major influence on the business sector; between disruptions in the supply chain, economic troughs, and a lingering switch to hybrid working, no organisation has been untouched by its impact.
The field of Mergers and Acquisitions (M&A) is no different: though 2021 saw more than $5 trillion in global volume, marking a record year for M&A and a more-than impressive rebound from the pandemic, 2022 did not achieve the same capacity for growth. Though the year started well, it was met with a quick plateau and ended up falling short of its prior benchmark due to a number of factors, including stock market volatility, soaring inflation, supply chain issues, and increased borrowing costs.
As a consequence, there has been a growing trend of divestitures and carve-outs caused by the resulting economic pressures. Companies are more-often opting to realign and consolidate their priorities and concentrate on core business units and areas of profitability.
This flatline is not completely pessimistic, however. Though an economic downturn such as this does create many challenges and higher risks, there is also plenty of room for exciting opportunities. For example, the risks involved give both buyers and sellers a reason to invest in thorough due diligence. In the case of divestitures, this includes a robust Transition Service Agreement (TSA) that supports a realistic transition period and a clear deadline for exit.
This article comprises one of six posts designed to provide and outline guidance for constructing and achieving a holistic TSA for your organisation.
What Are the Advantages of a TSA?
A TSA is a legally binding document that sets out the terms for a seller to continue running or supporting a purchased business unit during a transition phase. It then governs this transition period from financial close to separation, a period which can vary but often lasts for around six months (although up to a year is not uncommon).
The transition phase gives the buyer time to align and integrate the new business unit with their operations, including resolution of staffing and resourcing issues.
The main benefit of a TSA is its speed, accelerating the negotiation process without waiting for a buyer to assume full responsibility for the chosen business unit. This assures a quick resolution and efficient financial close during the transition.
While there may be some costs associated with implementing a TSA, the benefits usually far outweigh these costs in the long run.
TSAs Must also Be Managed Effectively
Although TSAs are the most efficient and rounded way of resolving a divestiture, they are not without their challenges. It is useful to understand these complexities and manage them with foresight to prevent delays and overspend.
It is useful to split these challenges into those affecting the seller and those impacting the buyer.
Not only does the seller have to devote a wealth of internal resources to the TSA during the process, but they are contractually linked to the buyer after its completion. This means that they could remain responsible for any employees that are no longer a part of their own team. This also includes certain accounting challenges, which compound throughout the transition but do not necessarily end upon its fruition.
Turning to the buyer, one of their biggest challenges could be a lack of flexibility during the process. For example, they might not inherit complete control over their new employees, and might have to rely on the seller to take responsibility for the hiring of new positions.
Overall, this can lead to a sense of confusion for both parties as to where the boundaries exist between their respective organisations. Because of this, TSAs are most often implemented as a last resort, which only exacerbates stress, costs, and tension in a relationship that will only continue beyond its completion.
How to Create a Holistic TSA
At Cambridge Management Consulting, our biggest piece of advice for the post-close transition is to start early in order to ascertain whether a TSA is required—as careful and thorough consideration and preparation of all factors is crucial to achieving a holistic TSA.
Due diligence should lead straight into these considerations, and the pre-close teams should hand over any information to the relevant governance office for the transition phase.
Managing a shorter TSA process is a significant factor in controlling costs. Both parties will be keen to avoid a drawn-out transition phase because this eats into value-creation for the buyer and often affects day-to-day operations for the seller—as well as being a huge drain on subject matter experts.
Delegation is also key: buyers should consider out-sourcing administration of services to a trusted third-party if this will shorten the duration of the TSA and save money in the long term.
This is where Cambridge MC is here to help. In the following articles outlining our approach to M&A services, we provide keen and detailed advice on how to construct a properly holistic TSA, covered in these five main areas:
- How to achieve organisational clarity: to properly understand the inner working of your TSA, including timelines, exit strategies, and how to achieve clear phrasing and detail
- The importance of governance and communication: the different roles required to execute a holistic TSA and how to achieve proper communication and cooperation between them
- Vendors and Contracts: the different stages involved with vendors and contract management, as well as clarifying the different types of vendor
- Culture and People: how to manage the minutiae and maintain the morale of employees throughout the transition
- Managing risk: the different issues and conflicts that might arise throughout a TSA, and the key points for mitigating such concerns
Get in Touch
If you would like to find out more about how we can help with any stage of due diligence, drafting your TSA and/or blueprints, as well as our Project Management and PMO as-a-Service, get in touch below.
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