My company is acquiring a unit of a competitor. I've been asked to develop a Transition Services Agreement (TSA) to enable the deal—what are the best practices for doing so?

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Acquisitions of business units typically present more complexity for buyers and sellers as the units in play invariably rely on the parent company for critical business functions that are not part of the sale (for example, information technology, human resources, and supply chains). As such, the buyer typically requires post-deal support from the seller (or vice versa) for a finite period of time under a transition services agreement (TSA). TSAs provide the legal, contractual framework for business continuity until the buyer can integrate the acquisition into its own operations.When buyers and sellers enter into transition negotiations, each side has different motives. For buyers, business continuity is a top priority, to ensure that critical functions remain in place until separation occurs. For sellers, being able to exit the transition period as quickly as possible is of paramount importance. In most cases, the seller is not in the business of providing outsourced services, so will want to refocus quickly on restructuring its remaining core businesses. Further complicating matters, the true costs of providing shared services are often unknown, leading the seller to aim for higher fees and profit margins during negotiations.Establishing the following guiding principles in the TSA will help prevent problems arising from these different motives:Define the nature of services and fees. Too often services are defined at the functional level (for example, in finance), which can quickly lead to confusion once the deal closes. Leading companies review each process across functional areas (for example, order-to-cash) to define the key steps and clarify the activities that are supported by the seller and which will require transition support. Establish the base for cost calculations. Because sellers are not typically in the business of providing the services included in the TSA to third parties, transactional costs are often unknown. Cost allocations charged back to a division can often provide a basis for estimates; however, the best base for calculating fees, including fixed and variable cost elements, is from actual cost drivers such as head count, office space, and server utilization. Set reasonable timelines. Set realistic, rather than aspirational, time frames not only to ensure business continuity, but also to ensure the buyer does not risk its integration and the seller can make appropriate plans for post-sale restructuring. The potential for extensions should be explicitly contemplated and negotiated, including penalty fees if the transition services are not exited as planned.Before the parties can draft a transition plan, several key areas must be defined and questions answered, including:Employees: Are there critical employees who should be specifically called out in the agreement? Which gaps need to be filled and how long will this take?Assets: Which assets truly belong with the acquired business, and which should remain with the seller? Where are the gapsServices: Which services will the seller have to provide through the transition, and vice versa?Financials: Are the business unit's financial statements a true representation of how it would perform as a standalone?Contracts: Which external vendor relationships are utilized by the unit that is being acquired? What actions and communications are needed to ensure ongoing supply of the needed goods and services to the buyer and seller?Answering these questions requires an understanding of business practices at deeper levels than what takes place in a typical due diligence process. While tight timelines and pressure make it easy to overlook the details, getting to a successful end-state requires it.To learn more about A.T. Kearney's M&A practice and our thoughts on TSA structuring, please visit our article onSecrets of a Successful Carve-Out.