Accounting for Transition Services Agreement

ASD is common, but it`s certainly not the only way to ensure a smooth transition. An international professional employer organization or international PEO allows companies to close the transaction without TSA. For any M&A transaction that includes a transition services component, it is the responsibility of the buyer and seller to reach an agreement on certain important considerations before entering into the M&A transaction. These considerations should be negotiated by the TSA parties as early as possible in the process, ideally during the due diligence phase. Here are the most important aspects to consider when negotiating and developing an ASD. Drafting and managing transition service contracts to achieve a quick and clean separation has been avoided buyers and sellers need to agree on a clearly defined strategy for how the business operates after closing, both immediately after closing and in the long term. Be prepared to identify the specific services that will be provided, the length of time those services will be offered, the appropriate service standards, and the applicable costs and expenses. Addressing these issues early will result in cleaner wording and fewer rounds of negotiation once the TSA is reduced to drafting. Practical tips on using Transition Service Contracts (ASAs) to achieve a quick and clean separation.

Assessment of the buyer`s needs. The main task of the buyer at the beginning of the transaction is to evaluate the seller`s responses to the requests described above (through initial meetings with the seller and due diligence questionnaires) so that the buyer has a better idea of the systems and services used to carry out the target business. The buyer must use this information to identify possible overlaps and gaps in its own capabilities and systems. In case of overlap, the buyer must identify the overlapping item to keep after completion. In the event of deficiencies, the buyer must indicate how inadequate or missing systems or services will be handled, para. B example by the buyer`s current systems and services, TSA services, or newly purchased systems or services. In addition, the buyer must examine how the target company`s and seller`s systems and services connect to their own technology procurement model. Incompatibilities with the buyer`s current systems must be detected and analyzed at an early stage in order to take further action.

The buyer must also evaluate the procurement options for the target company at the end of the TSA. To prepare for a successful implementation phase, assign executive sponsors from the buyer and seller to ensure that transition activities are clearly defined and maintained in relation to competing business priorities. Next, set up a separate steering committee of key executives to lead the program and address barriers to delivery. Transitional services arrangements are common when a large company sells one of its business units or certain non-core assets to a less demanding buyer or to a newly created company where senior management is in place but the back-office infrastructure has not yet been built. They can also be used in “carve-outs”, where a large company has split a department into a separate public company and then offers the infrastructure services for a defined period of time. The development of a Transitional Services Agreement (CST) is a common step in the M&A process. Although ASD is routine, it is still complicated, time-consuming, and not always well received by a buyer or seller. A global healthcare services company operating in the biopharmaceutical and medical device segments has completed the integration of a global business unit. Integration efforts covered more than 70 countries with different operational structures and using multiple IT systems. The challenge for the company was to ensure a timely and regionally staggered exit from TSA across all regions while maintaining global business continuity. For example, a large dealership may decide to sell a department to a small, growing auto company, and part of their deal involves the large auto dealership supporting the growing auto business with their human resources, IT, and accounting departments for about six months.

In theory, ASD is quite simple, and you`d be right to assume that. Service levels should be defined in tsa or supporting documentation with the right level of detail so that parties can understand exactly how the requested services are to be provided, but without giving the seller contractual “exits.” Avoid non-compliance with “reasonable, “commercially reasonable”, “best business efforts” and other similar performance standards that could allow seller to technically operate in accordance with the TSA, but without actually providing the requested services in a manner that provides the buyer with the benefit of its business. Buyers and sellers must agree on clearly formulated and objective pricing conditions. Unit prices, NRE hourly rates, deliveryability testing and acceptance procedures, transition times and staggered milestones are useful mechanisms to make pricing conditions as objective as possible. It is important that the buyer has the opportunity to extend the duration of the TSA with agreed price increases for the renewal terms. As our examples show, good negotiators and leaders can change the course of an exception. Start early and negotiate the TSA with the Asset Purchase Agreement (APA) led by experienced executives who understand how the two agreements work together. Also involve the operations team as they will implement the terms agreed in these contracts. A consumer goods company acquired a large spice company that was separated from its parent company. To ensure business continuity during the transition period, TSA services were established, but the length of service was limited to only six months. A diversified industrial company has divested itself of its portfolio activities.

Companies tended to be highly centralized and used a shared service desk for back office, IT, human resources, and purchasing. The companies` business activities also mixed sales and production. KPMG was tasked with helping the client identify entanglements and develop a 1-day operating model for “a typical portfolio asset.” This first exercise was the model for determining what a buyer would replace and what the seller would be willing to offer, and specific data elements were collected to help the customer determine prices and service levels. In back-office processes, for example, KPIs were collected and estimates of FTEs needed to support the processes were created. The high-level benchmarking allowed the client to determine how long it would take a buyer to replace the services (i.e. via outsourcing) and how long the client should reduce lost costs. Scope, duration and SLAs were documented in the service plans that the client used as a starting point for its divestiture work. By working with functional teams, the company determined which services it would not provide and which services would be difficult to provide. The entanglement led to possible actions that the client was willing to take as future restructurings and divestitures approached. At the end of the fiscal year, the client team worked with members of the company`s development team to develop a common understanding of the trade-offs between TSA`s different options. .