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Authors: Louise Chang, Henning Buchholz
Once the deal has been signed for a divestiture and the public announcements made, the seller may sometimes slip into thinking that the hard work is done. Leadership may take the view that the only thing left, essentially, is to wait for the transaction to close. This is a mindset rife with pitfalls.
Sign to close (S2C) is an important period—when a lot can happen. Nearly 70% of sellers report at least three months are needed between the execution of a purchase agreement for a divestiture and the close, with the plurality of sellers spending 3-6 months in this phase, according to Deloitte’s recent Global Divestiture Survey.1 More than a quarter of respondents say this period may stretch to more than six months, depending on regulatory hurdles, technology transitions, registration procedures, or other considerations.
During this time, there are plenty of things to do to keep the divestiture on schedule, prepare for the separation, and reduce business disruption. We see three areas, in particular, where a sharp focus before signing can help achieve a smooth close for the deal, limit strain on key personnel, and reduce business disruption. These are not the only three tasks that need attention, but they are areas that often get short shrift.
1. Identify entanglements
The goal should be to enter the S2C phase as a well-prepared seller. Early separation planning is vital, of course. A blueprinting process to assess the current state of the business and envision what’s needed to operate independently on Day 1 should be started even before the sale is being negotiated, as many sellers don’t have this information readily available.
Still, it can be difficult to complete these planning efforts before the deal is announced. The number of people who are “in the know” that a business is being sold will necessarily be limited prior to signing. And the senior executives brought under the tent for negotiations may lack the granular operational knowledge to fully understand what’s involved in separating the business.
A deliberate effort to evaluate entanglements between the seller and asset to be divested, in depth, is common as soon as a deal gets announced. Now the whole organization knows about the sale, and all relevant employees can be involved in figuring out what’s required for the transition. Assumptions made before signing should be validated, and decisions made about transition service agreements (TSAs) should be reconfirmed.
Discovering an entanglement late, just before closing, is far from ideal. This may result in a TSA that could have been avoided with more warning, or in the worst case, could result in a close date being pushed back.
2. Execute on TSAs
The point of a TSA is for the seller to continue to provide a service to the divested organization—to keep doing what it’s been doing for a while longer as the buyer establishes a new long-term solution. But rarely is it so simple. With a new party involved, new complications are likely to arise. In particular, there may be privacy or data-sharing concerns when IT services are provided under a TSA, often leading sellers to shy away from TSAs for this department. It may be necessary to create a new interface, train new people, or add manual processes to provide existing services while having them segregated from the seller’s ongoing operations.
Leadership may believe that the hard part is figuring out where a TSA is needed and negotiating and costing it out. The work necessary to operationalize the TSA can actually be just as difficult. Ongoing governance for TSA requests needs to be defined and processes need to be stood up. A company may not realize the complexities involved in creating an invoicing process for the TSA, for example, and may not get it set up in time.
The S2C period is also when seller and buyer should work out how TSAs will end and be exited. When the seller keeps a facility open or retains people on payroll to service divested operations, the timing of the exit from the TSA will impact the seller’s dis-synergies or stranded costs.
3. Manage communications
Another matter that sellers too often overlook is the need to establish clear procedures for employee interactions with the buyer during the S2C period. Employees slated to go with the divested operations will be pulled in several directions—working to keep the business running and readying it for independent operation, while also perhaps fielding requests from the buyer who is shifting gears toward a longer-term view.
It is not unreasonable for the buyer to want to talk to the people who soon will be joining their organization and will be running the operations that are being acquired. But at this stage the seller may face risks, especially related to the privacy of customer, employee, product, and pricing data that legally still reside with the seller until close, especially if such interactions are not properly managed.
For these reasons, it’s important to have a robust process to govern interactions with the buyer—and have them thought through and in place when the deal is announced. Typically, this responsibility will fall under the purview of the Separation Management Office (SMO). The SMO can be responsible for teasing out the interactions and requests that make sense now, pre-close, and those that need to wait until after close.
Robust process, significant benefits
Sellers face a learning curve when they undertake a divestiture, and we have seen that serial sellers will more often get things right in the S2C period. The benefits can be substantial when this phase is well run, with fewer disruptions to ongoing operations as well as potentially lower transaction costs and shorter separation timelines.
The key point is to proactively manage the separation process well ahead of time, and the three steps we’ve outlined here can help any organization to be sure that they are doing that—addressing some of the most important needs and risks that come along with a divestiture.
1 Deloitte, “2022 Global Divestiture Survey: Realizing value in a fast-paced market,” 2022.
Louise is a principal with Deloitte Consulting LLP’s mergers and acquisitions (M&A) practice where she advises life science executives through the M&A lifecycle to transform and position their organization for future growth. She has more than 10 years of consulting experience at Deloitte and has led over 30 global transactions, including acquisitions, divestitures, spin-offs and operations restructuring strategies. She has advised strategic and private equity clients on sell-side and buy-side activities across the entire M&A lifecycle. Her focus areas include program management, Day 1 readiness, Command Center setup, Day 1 / Day 2 planning and execution, synergy identification and planning, transitional service agreements, and legal entity review and transition. She has also led large transformational programs based in North America, Europe, and Asia.
Henning is a senior manager in the Merger & Acquisition Consultative Services practice with Deloitte Consulting LLP and Chief of Staff for the US Divestiture service offering. He has more than 10 years of experience leading large sell-side & divestiture and transformation programs with a focus on the life sciences and healthcare industries to help clients achieve strategic growth ambitions and optimize their performance. He has living and working experience in the United States, Europe, and Asia-Pacific. Henning earned a MSc in Economic Policy and Anthropology from the University of Oxford and BA in International Business from Meiji University in Tokyo and University of Bremen, Germany.