Understanding Transition Services Agreements in the purchase of Specific Business Units
When buying a specific business unit of a company, things can get complicated for both the buyer and the seller. The deal often relies on several services provided by the seller. So, what happens when the buyer needs the infrastructure or resources to support these services right off the bat? That’s where Transition Services Agreements (TSAs) come into play, like a trusty sidekick to ensure a smooth transition during the deal.
TSAs generally aren’t super complicated, but negotiating and drafting them can be. The buyer wants business continuity and time to establish critical functions, while the seller wants to close the deal and get compensated fairly. Especially in recent years, with COVID-19 and market volatility shaking things up, organisations have been racing to prioritise their core business and quickly offload their non-core assets.
So, what should be considered when negotiating and drafting a TSA? Let’s break it down.
Define Scope of the Services
The seller needs to spell out the specific services they’ll provide under the TSA – things like human resources, information technology, accounting, etc. Even facilities management could be included if the buyer is subleasing space from the seller.
It’s important to lay it out with enough detail so both parties are on the same page. It’s also advisable to leave room for flexibility in the TSA by including a mechanism for either party to add services that were inadvertently left out.
Standard of Performance
It’s not enough to rely on terms like “commercially reasonable.” It’s vital to outline precisely how the services will be delivered. We’re talking about ensuring that the seller provides those services to the business unit at the same standard and in the same manner as they’ve done before. It’s like a well-rehearsed performance that guarantees consistency and reliability. We don’t want the seller to go through the motions without providing the critical services the buyer needs.
Parties should also consider specifying the dollar value of services the seller will provide, ensuring that costs remain reasonable.
Solutions for Non-Performance
It’s crucial to plan for potential non-performance issues. The parties must have remedies, whether due to fundamental personnel changes or technical glitches.
To motivate compliance, a buyer could consider including a liquidated damages clause. This provides predetermined damages if the seller fails to meet their obligations, encouraging them to uphold the TSA terms.
Finding a balance between accountability and collaboration is critical. Swiftly resolving issues while maintaining a positive working relationship, the TSA journey stays on track, even when faced with unexpected challenges.
Third Party and Outsourced Service Providers
The seller may source some services from third-party vendors. It’s essential to ensure the seller has the necessary rights and consent from these vendors to provide services to the buyer.
Sometimes, the buyer may need to engage directly with the third party. If confidential information or personal data is shared between the buyer and seller, protecting it when involving a third party is crucial.
By managing these dynamics, the TSA can proceed smoothly, fostering a harmonious partnership between buyers, sellers, and third parties.
Termination
TSA are temporary measures, so parties should define how and when the TSA will end.
It’s advisable to create an exit plan that outlines the steps the buyer will take to build, outsource, or terminate the functionality provided under the TSA. Realistic timelines are critical to avoid any surprises along the way.
Sellers typically prefer a definite end date, as they want to detach from the carved-out business unit. On the other hand, buyers often desire more flexibility in termination. To address this, the parties can consider including a clause allowing for the extension of services, individually or collectively, with potential adjustments to the service cost. This provides flexibility while also discouraging unnecessary extensions.
By carefully navigating termination terms, the TSA journey can come to a satisfying close, accommodating the needs of both buyer and seller.
Takeaways
Transition Service Agreements are tailored to each unique transaction, but the above considerations are vital when negotiating and drafting one. A well-drafted TSA is an excellent tool to govern the post-divestiture relationship between parties and maintain business continuity.
Identifying and addressing these potential challenges will pave the way for a smoother negotiation and drafting process. It’s like charting the course before setting sail, ensuring a successful journey. A carefully crafted TSA will facilitate a seamless transition and establish a solid foundation for the ongoing business relationship.