For private equity, negotiating TSAs may ease supply chain woes

Waiting to discover equipment delays may be too late for PE firms to negotiate TSAs

Global supply chain issues persist, affecting the timely delivery of everything from computers and mobile phones to cars and airplanes—raising an important consideration for private equity firms negotiating transition services agreements for carve-out transactions. In the past, lead times to receive the necessary equipment for a network buildout were less than 30 days, but that number has risen to 400 days or more, significantly affecting buyers and sellers.

Buyers might not be able to fully separate from their parent entity or connect platform bolt-ons, resulting in extensions to the agreement. This interference can lead to related financial penalties or lost synergies due to an inability to integrate the new entity.

Likewise, sellers could get stuck in the position of providing network infrastructure for extended periods, facing a decision to cut off-network services or negotiate a TSA extension with no foreseeable end.

Which carve-out transactions are most at risk?

Smaller-sized deals seem to be most affected by network equipment delays. Consider this scenario: A buyer acquires a 40-person division and must determine whether to move the staff to a new office without a secure environment or maintain operations at the seller’s location for an indefinite period. In this situation, the risk management dilemma cannot be underestimated.  

Perhaps most concerning is that many companies won’t realize they have a problem until weeks after ordering network equipment, which is too late. The threat of prolonged supply chain disruption is a call to action for private equity firms to start conversations about mitigation planning.

How can mitigation strategies help?

Communication is key. PE firms should consult their solution advisor to understand the risks related to their transactions and initiate mitigation planning. RSM’s managed technology services complex delivery team recommends network TSAs, for example, be set at or extended to no less than 12 months, with 18 months preferable.

For additional flexibility, it’s prudent for firms to negotiate potential extensions at a decreased cost in lieu of penalty fees to avoid having to pay extra—the difference could save millions in costs. Assumptions should also be added to any statement of work or engagement letter executed with consultants or solution integrators to address TSAs from a buy or sell side.

It is also worth exploring alternative options for network equipment—examples include using software versus hardware for specific activities, or alternative technology solutions. If the preferred equipment isn’t readily available, opt for a competing brand that can be delivered right away. 

While these tactics may solve an immediate problem, they may also introduce a new set of risks. Use caution in creating a heterogeneous environment, which could increase support costs and overhead, as well as a company’s reputational risk if security is compromised. To help alleviate maintenance costs, it’s worth asking to extend support contracts to put devices back under warranty.

What other risks should PE firms consider?

Every stopgap measure has its pros and cons. An experienced solutions advisor can help navigate challenges before they arise by answering questions such as:

• If a firm purchases an alternative technology as an interim solution, does the investment become a subset of the total cost once the preferred solution becomes available? 
• If managed services are outsourced, how would short-term technology solutions be integrated into the deliverable?
• What other TSAs depend on network functions, e.g., cybersecurity and data, and what additional risks do these TSAs pose?

There’s no crystal ball to foresee how the supply chain problem may worsen, so it’s worth it for PE firms to acknowledge the risks to potentially save themselves considerable money, time, and headaches.