The seller and buyer should start talking about the Transition Service Agreement (TSA) early in the deal process. Ideally, the seller and buyer would involve a wide variety of people in early deal discussions. However, this is often not possible due to the need for confidentiality. The objective should be to involve the right people without impeding sale negotiations.
The seller should identify systems and services that are critical to the business after the buyer takes over. These might include:
• Human resource systems
• Claims/payment processing systems
• Web sites/e-commerce infrastructure
• Production/manufacturing control
• Interfaces for interactions with third parties
• IT facilities and resources
• Service agreements (outsourcing services, landline/mobile telecom and personal digital assistants (PDAs))
• License agreements
FOR EACH ITEM IDENTIFIED, THE SELLER SHOULD ALSO CONSIDER KEY ISSUES:
• What technology platforms are used?
• Was the system or service developed internally by the seller?
• Is the system or service “dedicated” or “shared”?
• Is it feasible to assign to the buyer any third-party agreements used to support the business, and/or whether consents are required to provide services under the TSA to the buyer?
• Are there commingled data or records that will be impractical for the seller to segregate such as email or historical or archived data?
The seller also should determine if any of these items will no longer be required after the deal closes. Doing this analysis early may help the seller get a better handle on IT-related transaction costs for the deal.
When selling a business, one issue that often is overlooked is whether any post-closing services need to be provided under a transition services agreement (TSA). This is particularly true when the sale is of a portion or division of a business rather than the entire enterprise. In the next few blog posts, we’ll look at when TSAs are advisable and how to use them.
IS A TSA NEEDED?
The buyer and seller should determine early on whether they need a TSA. Not every deal requires a TSA. However, if either party will need assets or assistance from the other party after closing, a TSA is advisable.
TSA LENGTH: HOW LONG?
A TSA of 3-6 months might be sufficient to deal with system migration and training issues. But in a complex situation, for example, if the buyer will need to rely on systems controlled by the seller, a multi-year TSA may be required.
TSAs: BEGIN EARLY
TSA issues should be contemplated while the structure of the transaction is still in flux and before the buyer has been identified. For this reason, the seller’s initial preparation is likely to be refined as the deal progresses. Nevertheless, there can be significant value in careful planning early in the deal process, in part because this enables the seller to present a workable deal package to the buyer, including information that the buyer will need to quickly assess any overlaps or gaps in assets and capabilities for running the target business.
Both TSAs and outsourcing agreements often involve one party providing the other with services. However, in TSAs, the seller (as the service provider) is generally not in the business of providing those services. Therefore, a seller may only be willing to commit to provide the TSA services in the same manner that it provides similar services to itself.