M&A: Planning For Day One

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Continuing on the topic of M&A, deal flow has been low during the pandemic. It will likely start again in earnest once the markets perceive the impact from COVID has crested. Last weeks we discussed overall planning for an acquisition. My area of expertise is thinking about things from an operational perspective and by that I mean effectively running the combined entity: serving customers, running factories, paying employees and vendors, generating cash flow, leveraging the deal value that you envision.

There are lots of challenges with joining two companies together (leadership teams, org charts, systems, customers, vendors, legal and regulatory, to name a few) but unless you’ve done this before, getting to Day One may be harder than you think. How much do you invest in Day One preparation when the deal has not closed?

How much do you invest in Day One preparation when the deal has not closed?

There are a couple of Day One-related deal points to consider, primarily from the buyer’s standpoint. The first is a breakup fee, and the second is Transition Services Agreements (TSA’s).

Breakup fees are often found in Letters of Intent. A breakup fee, which can be 1% – 3% of the deal, compensates the buyer for the cost of time and resources expended should the seller decide not to go forward, as well as serves to inhibit the seller soliciting competing bids. So the seller has to carefully consider entering into an agreement, and the buyer gets some insurance against the cost incurred for preparing for Day One.

Transition Service Agreements (TSA’s) are used when the buyer needs to procure services and know-how from the seller after Day One. TSA’s are more typically used when buying a division of a larger entity. In my experience, this is commonly used in systems conversions. For example, the buyer enters into an agreement with the seller to continue to support information on the seller’s ERP for one year post-close, at which time the buyer will have converted to its own ERP. While the scope of TSA’s are pretty straightforward, the pricing is more difficult. In the ERP example, the seller has to task its team to carve out the systems and data for the division being sold, agree to service levels and then determine the cost of that support. In my experience, most sellers do not price this competitively unless these are considered early in the negotiation process. After the deal is done, determining you need a TSA can be very expensive for the buyer!

While I think about key areas from an operational standpoint, the partners at BKM Sowan Horan are more qualified to speak to the financial and tax planning standpoints. Let us know how we can help you.


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