How collaboration in developing and executing transition services agreements enables successful carveouts
Executing attractive carveouts in the current market environment is tough. Sellers and buyers are turning over every rock, negotiating aggressively across all deal elements - value, risk, timing, financing, contingencies, etc. Both sides, as they should, want the edge and want to win.
Transition services agreements (TSAs) are core to many carveouts. These broad (80-150+ services provided from seller to buyer – and some additional in reverse) and lengthy (12-18 months+ post-close, with a longer tail for IT) agreements are a critical enabler – without them many carveouts would not be operationally feasible at deal close.
Some sellers and buyers are bringing the “win” philosophy to the TSA negotiating table as well. Examples we have seen recently include:
- Sellers: “We will not provide service level commitments” or “We will support IT for 6 months, but not longer” or “After the first 6 months the cost increases 10% per month.” This is despite the fact that both parties know it will take at least a year for a successful operational separation.
- Buyers: “We don’t accept your people costs. Give us a 50% credit.” But they already know the legitimate market costs (in this case, for in-demand product engineers) are correctly reflected in the TSA pricing.
- Or for both parties: Getting bogged down in lengthy debates about what backup information will be available when TSA invoices are presented post-close or resisting any allowance for common sense to dictate how issues and disputes will be resolved post-close.
As a hands-on advisor to both sides of major deals, we’ve developed a unique perspective. Despite their magnitude and importance, our experience is that when it comes to TSAs, collaboration is the path to create a “win-win” for both buyers and sellers. The TSA is an operational deal enabler and should be treated as such. It is not a place to extract more value.
Some buyers or sellers might feel “We have leverage in this deal. Why not use it to make the TSA less of a burden / more advantageous for us?” From our perspective, it's best to apply that leverage elsewhere in the deal pricing or terms. Inevitably, lopsided TSAs lead to operational challenges and disputes which end up absorbing significant amounts of scarce management time at a minimum and potentially legal fees as well. It may feel like a victory on paper at signing or deal close, but in the end, it doesn’t pay off.
Deal investors are wise to this as well. In a recent global deal in which we supported the buyer in operational diligence and sign-to-close, 100% of co-investor candidates—many of them large, sophisticated sovereign wealth funds—asked us multiple, detailed questions regarding our view on the state of readiness, scope and flexibility of the TSA. They knew, as we do, that the investment, while attractive in theory, would not get off the ground without a well-developed and sensible TSA.
Within the realm of collaboration, here are key lessons learned to consider for your next TSA.
There are other lessons we’ve learned to protect buyers, sellers and investors through TSAs. Let’s talk about working together to limit the disputes and skepticism in creating an agreement that’s right for the deal—and all parties involved.