How to plan and manage TSAs

Draconian financial penalties & how to avoid them

Prepared sellers start by creating a list—in advance of negotiations—of all IT services the parent/selling company currently provides to the business unit to be divested. 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—begin working together in this way?

Preparing a decision matrix that clearly articulates which services will and will not be available to the buyer after the transaction closes, as well as the rationale behind these decisions (non-transferrable licenses, key personnel transferring with the deal, etc.), 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 as well as those that are out of scope. In addition, such agreements typically define the IT services to be provided, along with the duration, extent, and cost of the support, among other details. IT services, specifically, require this level of rigor to set expectations between parties and 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 that each party must meet 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.

The buyer has the interest to maintain service continuity once a deal closes. Yet, you the buyer would much rather play offense than defense. The buyer doesn’t know the systems, processes, and people as well as the seller, and might come up with a lot of bad ideas that could ultimately disrupt transition progress. So 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. TSA 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. So a well-managed, structured transition plan is critical to prevent expensive penalties and business disruptions for the buyer.