Reblog from April 2024 HR M&A Roundtable Newsletter
I’m about to work on my first deal with a TSA. Do you have any tips for me?
TSAs are often needed to manage the transition of an acquired business for both the buyer and seller to be successful.
For the buyer, a TSA can help to:
● Ensure critical business function continuity during the transition period.
● Avoid disruption to customers and employees.
● Bridge gaps in expertise in running the business with access to the seller’s expertise and experience.
For the seller, a TSA can help to:
● Mitigate the risk of losing customers and employees during the transition period.
● Ensure that the buyer can successfully integrate the acquired business.
● Give additional time to manage any stranded costs as the business becomes smaller.
The terms of a TSA will vary depending on the circumstances of the acquisition, but the most common TSA failures are:
● Poorly defined services: The scope, duration, and price of services to be provided by each party is not clearly defined, leading to misunderstandings and disputes.
● Unrealistic expectations: The TSA does not allow enough time for the buyer to transition to the new services, leading to disruption and inefficiencies.
● Inadequate pricing: The price of the services is not based on fair market value, leading to either buyer or seller dissatisfaction and if too low, poor incentives to end TSAs.
● Lack of communication: The buyer and seller do not communicate effectively, leading to problems and delays.
● Poorly defined dispute resolution and termination provisions: The TSA does not clearly define the circumstances under which either party can terminate the agreement, leading to uncertainty and legal disputes.
A Few Recommendations:
● Get input from relevant stakeholders, including legal, finance, and operations teams to ensure that the TSA is properly drafted and executed.
● Communicate broadly why the TSA is the best option to both buyer and seller rather than the long tail of the trivial many.
● Be clear that the TSA is not an enduring service line; the objective is independence.
● Set clear and objective measures of service levels and cost. Monitor the performance of the seller and terminate the agreement if necessary. (Pro-tip: allow the costs/service levels to be fit for purpose yet worse than market or to diminish at an agreed upon timeline to motivate conclusion of the TSA)
● Identify a person to fully own and advocate for the interests of the buyer and the seller early on. Being generous with each other often ends with contempt as the group struggle to operate independently. Assign someone to think with bias for each group early on so that you have empathy for the two future independent parties before it’s needed.
● Ensure you are planning for your fixed cost service teams and variable cost service agreements to be resized appropriately to serve the smaller customer base by the end of the TSA period.
