September 30, 2022

Divestitures: Transition Services Agreements

Because a divested business’s infrastructure is often so intertwined with the seller’s other businesses, a divestiture buyer often needs the seller to continue to provide certain services to that business for a period of time after the closing.  A transition services agreement is typically the mechanism used to identify those services & lay out the terms and conditions under which they’ll be provided.

This Deloitte memo provides an overview of some of the key issues that need to be addressed in order to ensure the effectiveness of a TSA. Here’s an excerpt discussing the need to identify the services that will need to be provided even before identifying a buyer:

Even without an acquiring business in place, a divesting firm can do its disentanglement evaluation and probable TSA planning. This allows for early negotiations about what services and levels it is prepared to supply and what it would cost for the parent company to provide those services. The teams will need to leverage functional blueprints to agree on the scope of services or processes to be covered under TSAs.

After a buyer is identified, the aim of both the entities should be to fix the scope of various services during the initial negotiations to provide both the entities clarity on the details of the services being negotiated. The final list of TSAs may differ from the original list as the buyer may have a substitute service/process already in place either in-house or through a vendor providing similar services.

In addition to review other planning-stage considerations, the memo also provides insight into how to determine the cost of the services to be provided and potential areas of friction that may arise during the negotiation process.

John Jenkins