The critical elements of Transition Service Agreements (TSA) that you need to have on your M&A radar screen

Seasoned M&A experts know the value of Transitional Service Agreements (TSA). Common in carve-outs, large company division selloffs, and non-core asset sales a TSA outlines the services the seller will provide the buyer for a certain price and predetermined period. Backoffice infrastructure functions such as Human Resources (HRIS), Finance and Accounting, IT, and Logistics are prime TSA candidates.

A TSA offers both the seller and the buyer the possibility of closing a deal quickly while supporting business continuity for the acquiring business, but not all TSAs are created equal.

At Uptrend Labs, we focus on the technology underlying the business, as it typically represents over 50% of TSA service costs and requires the longest duration to exit. Software licenses and managed service contracts in turn make up a significant portion of the total technology costs. An effective way to manage these cost elements is to identify opportunities for cost-free software license price transfers or options to move from on-premises solutions to a less expensive cloud solution.

In many cases the seller’s business process software and tools may be costly and outdated and taking the opportunity for an update could be beneficial to the buyer in turns of improved employee productivity and lower costs, keep in mind software vendors are eager to maintain existing customers, particularly if there is the potential for new license activity post-TSA. The same can be said for IT managed services contracts which can be updated and renegotiated to more favorable terms for the buyer.

While each function, work process, or technology must be carefully studied by the functional subject matter experts independently of each other, a second key element of an effective TSA agreement is to call out any critical technology interdependencies to areas that have a dependency. Some recent interdependency examples that I have come upon have been clustered around the single sign-on (SSO) authentication and overall IT systems access. Independent systems like Human Resources, payroll,

and benefits (HRIS) will need a significant period of access beyond other business process systems, creating codependency in the process. Having an experienced IT systems consultant overseeing the entire TSA is critical to avoiding interdependency pitfalls.

A third TSA critical element should be the use of a cost escalation provision within the TSA. This will provide an incentive for the buyer to remain on schedule to finish the systems required to exit the TSA in a timely fashion. Each function area should be assigned a “complete by date” so the functional leaders understand the timeframes and the potential penalties for a missed deadline.

Final thoughts

A TSA offers both a seller and buyer the opportunity to close a deal quickly and help manage business continuity for the acquired business. At Uptrend labs, we have the depth of understanding and the technological know-how to guide you through the complexities of authoring an effective TSA agreement.

Contact us to discover a new kind of collaboration, a new kind of approach to technology, business, and of course the best practices for understanding the key elements of an effective TSA agreement.