Going through M&A? How to plan for the TSA

Mergers and acquisitions (M&A) can help SaaS companies rapidly unlock tremendous growth.

The Transition Services Agreement (TSA) helps companies smoothly complete a merger or acquisition by giving the buyer temporary operational support for an agreed amount of time.

In this post, we’ll walk you through TSA planning.

We’ll start with a quick review of what a TSA is and why it’s central to M&A success.

Then, we’ll outline what a TSA can help you with, break down the key ingredients of a TSA, cover best practices for a swift exit, and more.

If you’re going through SaaS M&A, this post will help you nail your TSA planning.

Here’s what we’ll cover

Transition Services Agreement: a brief refresher

After a merger or acquisition, the buyer often lacks the operational infrastructure needed to run the business—accounting, HR, and customer success teams are common examples.

A TSA is an agreement where the target company agrees to supply these services to the buyer for a certain amount of time while the latter builds out its operational capabilities.

SaaS companies’ tech stacks have grown more complex in recent years, and the boundaries between departments can sometimes blur.

This makes having a well-planned TSA even more for setting up a clean and cost-efficient exit.

With that in mind, let’s dive into the key purposes of a TSA.

Why are they such an important piece of the M&A equation, and how do they help you stay organized and efficient during this key transitional period?

1. Understand your costs and exit strategy

As the target company in a merger or acquisition, the TSA will give you a clear understanding of your costs and exit strategy.

Having your operational obligations clearly defined from the outset will help you keep the transitional part of your M&A deal short and sweet.

This helps minimize costs and maximize profits to keep investors happy.

Additionally, your TSA is about starting with the end in mind and creating an exit path.

The core purpose is to ask, “How are we going to get this done as quickly and effectively as possible?”

Certainly, provide the buyer with a high caliber of transitional services, but remember: a smooth exit is your priority.

2. Define and clarify the charge-back rules

In your TSA, you’ll want to define the charge-back rules as explicitly as possible.

Failing to spell out precisely what support your company will provide, at what cost, and for how long can result in disputes and M&A litigation.

Your TSA should help you plan for charge-back contingencies.

For instance, if the buyer still needs transitional support after the agreed end date, will you provide it?

If so, how high will your calculated service markup be? Keep in mind that it usually takes about three to six months to transition off a TSA.

Now that we’ve reviewed what a TSA is and why it’s vital to the M&A process, let’s discuss some TSA planning best practices.

Get everything in writing

One of the most important TSA tips you can follow is to get everything written down. We can’t emphasize this enough.

With respect to TSA planning, your philosophy should be, “If it wasn’t written down, it never happened.”

Your goal should be to transition off your TSA as quickly and cost-efficiently as possible.

You can only achieve that by paying extreme attention to detail and committing everything to paper.

Getting everything in writing will help you:

• Avoid costly M&A legal disputes
• Maximize overall profitability
• Bring clarity to a complex and stressful process

It’s also important to give both parties’ legal departments time to review the agreement to ensure it’s satisfactory.

Be explicit about your TSA’s termination date

When planning your TSA, you’ll want to be abundantly clear about its termination date.

Depending on the scale of the transitional services you provide, even an extra few days can interfere with a clean exit and harm the deal’s profitability.

This is one area where extreme attention to detail pays off.

For instance, if your initial agreement says “90 days,” but your TSA says “three months,” that’s a big problem.

Three months is 92 days, so you could end up needing to provide an extra two days of infrastructure support.

Make sure that your TSA’s termination date is clear and consistent across all relevant documents.

Plan for contingencies

Keeping on the theme of attention to detail, you’ll need to plan for contingencies when drafting your TSA.

Failing to do so can cause stress and friction for both parties once the “honeymoon” phase of the deal wears off.

Plan for questions like:

• If work laptops are needed, which party will supply them?
• Whose servers will data be hosted on during the transitional period?
• Are there any stated consequences for failures in service performance?

In TSA planning, the devil is in the details.

Be mindful of geography

In some cases, you might end up providing transitional support services in different geographical areas.

This can impact everything from taxes to regulatory considerations and more.

Make sure you understand precisely where you’re offering support.

The last thing you want is to land in regulatory hot water over a TSA oversight.

Don’t request unnecessary changes

Remember that the goal of TSA planning is to get it done.

You want to minimize any complications that will prevent a smooth and timely exit.

You should ask two questions about any changes you’re considering:

1. Is this absolutely essentialto our company’s exit strategy?
2. Could this change have unintended consequences or somehow slow our exit?

Be rigorous about passing any TSA changes through both of those filters.

Stay engaged and have a communication plan

During a merger or acquisition, both parties involved in the deal will be incredibly busy. With so much going on, communication can sometimes fall by the wayside.

Don’t allow it.

Staying engaged throughout the entire M&A process is crucial to a successful exit.

See if your counterparty will agree to a set communication plan.

Go the extra mile to stay in touch, and make sure you continually monitor your TSA progress.

Lapses in communication or attention to detail can cause serious problems at this stage.

Leverage enterprise tools to help

Finally, you’ll want to be sure you choose the best available SaaS tools to set yourself up for a successful exit.

On the one hand, you need to know that your data is secure and backed up. And on the execution side, you need a way to streamline the accounting piece of the puzzle.

CrashPlan is an encrypted cloud-based computer backup and recovery solution protecting over 900,000 customers worldwide.

They provide automatic, unlimited endpoint data backup that enables organizations to safeguard their data during employee transitions, device migrations, legal holds, and data loss events like ransomware.

Sage Intacct can make sure the financial aspects of your TSA go to plan.

Intacct automates your billing and invoicing for TSA support, helping you avoid manual errors and exit on schedule. On top of that, role-based dashboards make financial planning and board reporting a breeze

With Sage Intacct and CrashPlan, you can inform your investors of your TSA’s progress in real time, and you’ll never have to worry about business continuity.

Learn even more about TSA planning

We spoke at length about TSA planning at the Modern SaaS Finance Forum.

Hosted by Sage Intacct, this full-day event was attended by 2,000+ SaaS industry leaders, investors, and experts.

With presentations from finance leaders at top firms, the conference had three different learning tracks for CFOs,

Controllers, and RevOps managers at SaaS, high-tech, and AI companies.

We received great feedback from attendees, so we’ve made the conference sessions digitally available to anyone who missed the event or wants a refresher.

Click here to access the 20-minute forum sessions. You can download as few or as many as you’d like.