A simple guide to complex interim operating models

Maximizing value. Minimizing complexity. A guide to IOMs.

Interim operating models (IOMs) intricately map out how legal entities interact with customers and each other, orchestrating a seamless post-M&A dance between sellers and buyers. With strategic considerations and cross-functional expertise in play (i.e., tax, legal, HR, IT), the possibilities are limitless—ensuring smooth governance across specific geographies.

Four common IOM archetypes.

While every interim operating model is unique, there are common constructs that detail how legal entities transact with customers and other legal entities after principal close of an M&A transaction.

Disclosed agency: The principal (buyer) appoints an agent (seller) to act in its name and on its behalf—the structure is disclosed to relevant third parties.  

Undisclosed agency: The principal (buyer) appoints an agent (seller) to act in its own name but on the principal’s behalf—the structure is not disclosed to relevant third parties.

Distributor: The buyer appoints the seller as its distributor. The local market transaction has closed, but the buyer cannot yet fully operate independently.

Net economic benefit: Seller continues to own and run the business locally and pays the buyer the net profit (or collects loss).

Regardless of the archetype, every IOM is complex. Our new research paper provides a high-level perspective on how to approach them most efficiently.


Cash management and settlement

In a complex global M&A transaction, various agreements are involved, including asset transfers, liabilities, revenues, and operating models. This process can be intricate and time-consuming due to factors such as tax implications, working capital needs, and foreign currency risks. For instance, cash flows may be affected in agency or distributor markets where the buyer takes over operations, and settlements in certain countries may expose them to foreign exchange fluctuations.

Planning for the conclusion of operating model agreements and establishing necessary financing/structuring before their end is crucial for both parties involved.

Revenue recognition (and accounting treatment)

The sales and distribution model used during the interim operating period is crucial. It affects finance, tax, IT, and supply chain operations. The specific agreement between the parties directly affects how revenue is recognized for product sales during this period. Key considerations include determining which party controls the product before sale and whether an entity acts as a principal or an agent in the transactions. There are several considerations to take into account:

Agency model

The agency model can be disclosed or undisclosed. In the disclosed model, the seller (agent) works for the buyer (principal) and receives a percentage of revenue as a fee. This model requires the seller to update systems to reflect its role as an agent. The undisclosed model causes less disruption in the order-to-cash process but is not permitted in some jurisdictions.

Distributor model

In markets where an agency model is not allowed or is cost-prohibitive, buyers may use a distributor model with the seller. The revenue recognition depends on whether risk and control will transfer to the seller under the distribution agreement. If risk and control do not transfer, the buyer records revenue at the time of sale to a third party and separately notes the distribution fee paid to the seller. If risk and control transfer, the buyer records revenue at the time of sale to the seller and accounts for the remaining profit on a “net basis.” These scenarios are focused on US GAAP, and local GAAP may have different accounting treatments.

Net economic benefit (NEB)

Unlike the distribution model or the agency model, under the NEB model the seller still owns the business in the local market until full separation in the market. The seller continues to operate the business in the local jurisdiction(s) as is and pays the buyer globally (in an agreed jurisdiction) the net profits of the local operations on a periodic basis.

This model typically is used where there are regulatory reasons a local market cannot close at the time of the global M&A transaction, or the buyer does not have the IT systems to operate the business. The advantage of this model is that the seller has operational expertise and know-how in that market, whereas the buyer potentially lacks the expertise and infrastructure to operate efficiently.

Local regulations

Interim operating models are inherently complex. They may be governed by specific regulations that vary from country to country. Local tax, finance, and compliance regulations should be carefully considered and planned for when defining the appropriate model to implement per market. Each jurisdiction will have its own definitions, registrations, and filing requirements governing what is possible.

Governance structure

To develop effective interim operating models, it is crucial to have the right team of leaders involved from the beginning, given the complexities across the business. This team typically comprises leaders from finance, accounting, tax, operations, supply chain, commercial, regulatory affairs, global trade, regions, legal, and IT. The project management office (PMO) provides strategic direction, while key functions, such as accounting, tax, treasury, regulatory affairs, supply chain, IT, and legal, are responsible for designing operating model solutions and implementing milestones.


Mastering the art of interim-state cash settlement, revenue recognition, governance, data segmentation, and VAT is the key to success for finance leaders. It ensures smooth transactions, market value, and continuous core operations. Those who excel in these areas will seamlessly transition to their end-state operating models, securing a winning position for their companies.

To discover more about successful IOM implementation, download our report.

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