When a company is sold or when a division is carved out, there’s an expectation the seller will continue to provide certain services to support the buyer while it establishes operations.
Often the parties enter into what is known as a Transition Services Agreement (TSA), governing the temporary provision of services to the NewCo. Both parties should consider if this is needed as early in the process as possible, what the scope will include, and what the duration of the TSA will be based on the complexity of the transaction.
The onus is on both buyer and seller to reach an agreement on certain key considerations prior to the closing of the M&A transaction, though the buyer is the one with the most at stake if things don’t go according to plan. Consideration must be given to, for example:
- The scope of services
- Performance requirements
- Review and audit rights
- Data privacy concerns
- Plans for major service continuity issues
- Pricing mechanisms
- TSA duration and options to renew/extend
But no matter how detailed your TSA is, there are two big risks you may not be considering: the compliance risk of making incorrect assumptions about the services needed, and the ongoing cost of being serviced under a TSA.
Lessons from the field
Over the years I have been involved with billions of dollars’ worth of M&A transactions. In recent transactions, having been called on by the buying organization, I have seen sellers agree to provide certain back office services for a period of time, but the buyer was paying millions for the privilege. The sooner the buyer could peel away from the TSA and start delivering services on their own, the more savings the buyer would realize, further amplifying the business case for the deal.
In a similar vein, a technology company doing a carve-out transaction where the seller agreed to provide some basic accounting activities for a period of time under a TSA. The buyer quickly realised they weren’t covered for any statutory requirements in a region that can be incredibly complex for compliance.
In both cases, TMF Group was able to step in and offer a solution; it’s this solution we now name QuickStart: to Carve-Outs.
I’ve found over the years that buyers assume all they need in these situations is the transactional side of company finance; they’ve never operated in these countries before, so it’s an easy assumption to make. But there’s no insight into the statutory requirements. A US buyer is typically focused on US GAAP, rightfully so, and they write the TSA with a US GAAP accounting hat on. The buyer thinks they’re covered - and then day one of operations comes along, and they soon realise there’s more to it. The buyer can easily underestimate local GAAP needs in the newly acquired countries, and that can be a very costly mistake.
To TSA, or to fully outsource?
So let me add one more consideration to your early checklist: will you be better off, long-term, outsourcing the operational services to a trusted partner from the outset? This can be more cost-efficient, and less risky, as you will receive local knowledge of regulations alongside the provision of services - knowledge that will stay with your NewCo, and not disappear at the end of a TSA.
A partner with truly in-house global coverage - not one that will outsource your work to a different offshore facility than the seller - can get you operating in your new markets seamlessly, quickly and with minimal fuss. And that may turn out to be the best decision for your NewCo in the long run.