Here’s a common issue facing private equity firms today: How do you keep a newly divested business running and ready to become a part of something bigger than itself or stand on its own? This is not something that can happen overnight if the business was deeply entrenched in its old home and lacking its own administrative capabilities. Private equity firms find they need an expert team to handle the transitional time, to take the divestiture over the goal line.
Typically, depending on the size of an M&A deal, companies negotiate such details in a Transition Services Agreement (TSA). The TSA outlines what services the seller will be responsible for as the buyer gets ready to make it a part of its business (it may be absorbed by a PE firm’s portfolio company, for example, or become a standalone entity). Areas addressed in the TSA may include such services as finance, human services, legal, tax, IT and facilities. Everything in the TSA can affect whether the transition will be a smooth one and whether the deal will be successful.
The problem is who can fulfill those services? Oftentimes, neither the buyer or seller has the capabilities or capacity to do what needs to get done in the interim.
How a Symantec divestiture was streamlined
PE firms often lack the bandwidth and resources to immediately provide centralized administrative services for each company they acquire or are in the process of selling. What’s needed is a deeply experienced, multifunctional team of operational experts who can help out in the meantime, by focusing solely on meeting the needs of the TSA and bringing it to a successful conclusion. They fill a critical gap until a divested business unit can stand on its own or be fully integrated.
This was the dilemma facing software giant Symantec when it was in the process of selling its VeriSign business to a private equity–backed company, DigiCert. VeriSign had disparate systems and had never been segregated. Its global revenue was 400% of the acquiring company’s revenue.
Neither side had the resources to segregate the accounting records and processes. RoseRyan was brought in to provide transitional leadership, accounting, finance and operational support, to address the needs of the divested company for up to 18 months. We quickly organized a high-performance, specialized team of 13 finance pros dedicated to this important endeavor, which included:
- Setting up systems and processes the divested business could run with when it became part of DigiCert
- Creating stand-alone financial statements
- Producing on-time financial closes for the newly segregated business
- Smoothly implementing services outlined in the TSA and achieving an early exit from the agreement
- Fully supporting the first financial statement audit
- Focused solely on meeting delivery success, to reduce risk and get the deal done quickly
TSA support: A rising need and how to get it
We expect a pressing need for transitional leadership and support as divestitures are projected to rise. In a recent E&Y study, 87% of global companies surveyed said they plan to divest over the next two years. For the same study in 2017, just 43% of companies said they were looking at making a divestiture over a two-year horizon.
Companies going through such a major strategic shift put the value of their deals at risk if they don’t know all the capabilities and processes required to keep the businesses running. Sometimes a seller may decide to fulfill the TSA requirements with the help of their employees, but they often find this setup isn’t ideal. It leads to overworked employees doing duplicate work, and it can create confidentiality and control issues around the data they’re segregating.
The better approach is engaging a third-party team that’s committed to the TSA (and not distracted by other priorities presented by the buyer or seller). Here’s why:
- The buyer can focus on hiring and ramping up to take on the accounting when it’s ready and focus on the other aspects of the integration.
- Value is preserved and created, since the team is dedicated to the transition’s success.
- A team that’s steeped in transitional and operational experience increases the likelihood of a smooth and timely (even early) exit from the TSA.
It’s best to look for a multifunctional team that has both strong operational and financial experience, and broad technical skills. Seasoned finance pros who can jump in when challenges arise because they’ve seen it all and done it all before will help the companies involved transition successfully and realize value quickly.
David Roberson is a vice president at RoseRyan, leading our cannabis business, heading up large-scale client engagements, and expanding our consulting firm’s presence in the private equity space. Formerly the CEO at Hitachi Data Systems, Dave led the complex TSA project last year that helped get the Symantec/Digicert divestiture over the finish line. In addition to holding a variety of senior level roles at Hitachi, Dave previously served as a senior vice president for Hewlett-Packard. He has also served as a director of 12 companies.