DealLawyers.com Blog

A recent FTI Consulting article provides advice to sellers on strategies to ensure that the TSA they enter into in connection with a divestiture facilitates seamless transaction and protects their financial and operational interests.  This excerpt discusses how sellers can manage financial exposure and limit operational burdens in the process of determining the services buyers may require and the ones sellers are willing to provide:

– Assess Contractual and Operational Feasibility: Review vendor contracts to confirm which services can be legally provided under the TSA. For example, payroll providers, real estate subleases and systems like enterprise resource planning (“ERP”) often require third-party consents, which may incur fees. Identify operationally complex or costly services, such as benefits administration or treasury, and consider excluding them to streamline delivery.

– Exclude Strategic or Sensitive Functions: Avoid providing services related to post-closing strategy, such as financial planning, sales forecasting or marketing. These functions can expose proprietary knowledge and entangle sellers in long-term decisions. Maintain a focus on operational support to reinforce boundaries and avoid exposure to strategic or commercial risk.

– Understand the Buyer Type: Tailor the TSA based on whether the buyer is strategic (likely to integrate the target) or financial (likely to operate it independently). Strategic buyers may require a narrower scope and shorter duration. Financial buyers, such as private equity sponsors, often require broader services and longer timelines to support the stand-up of a new platform.

– Mitigate Stranded Costs Proactively: Stranded costs, such as underutilized staff, systems or facilities, can erode margins following a divestiture. Enable buyers to exit specific functions in a phased manner to reduce delivery complexity and protect the seller’s cost base. Evaluate changes to scope and duration through a lens of cost recovery.

Other topics addressed in the article include pricing provisions, transparency and governance arrangements, IP and data security, the need for robust exit mechanisms, the need for clearly defined performance metrics and accountability, and the need to build in mechanisms for managing change and fairly allocating risks.

– John Jenkins