Financial Penalties & How to avoid them?
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Prepared sellers start by creating a list of all IT services the parent company currently provides to the business. Leadership determines which services on the list it can or would provide to the buyer by evaluating the potential risks or costs involved in becoming a “service provider.” For example: would IT have to build firewalls to prevent the buyer from accessing sensitive data? Would providing services during a transition period raise regulatory concerns as two competitors? Particularly those in highly regulated industries such as financial services?
How to Plan
Preparing a decision matrix that clearly articulates what services may be available to the buyer after the transaction closes. Along with the rationale behind these decisions can add objectivity to what can often become a highly charged conversation.
Once services are agreed upon, the close documentation can clearly stipulate the provided services. In addition, such agreements typically define the IT services to be provided. Along with the duration, extent, and cost of the support. IT services require this level of rigor to set expectations between parties. They also assist in issue escalation and remediation during the term of the agreement.
Clear understanding of extra cost, charges, or penalties for services supplied is critical prior to the close.
TSAs should be drafted with the end goal in mind: Bringing an orderly end to the transition phase and exiting the agreement. A step-by-step separation plan that lists incremental milestones, deadlines, and the transitional responsibilities. This can help prevent delays and manage associated risks.
The buyer should be responsible for crafting a separation plan and have as much input to the TSA as possible. Since they have an interest to maintain service continuity once a deal closes. The buyer would much rather play offense than defense. They don’t know the systems, processes, and people as well as the seller. Therefore, they might come up with a lot of bad ideas that could ultimately disrupt transition progress. Hence, maintaining a good working relationship that is structured, governed and managed properly is ultimately important for the success of the TSA exit.
TSA have cost implications that also need to be managed closely. Cost can escalate greatly for each month over the expiration date this miss can consume quickly the company’s overall financial goals for the deal. Hence, a well-managed and structured transition plan is critical to prevent expensive penalties or business disruptions for the buyer.