Mergers and acquisitions (M&A) transactions often involve selling a business unit deeply integrated into the parent company’s infrastructure. When the deal closes, the buyer is immediately responsible for operating the acquired entity but frequently lacks the necessary standalone systems to do so on day one. This operational gap arises because functions like payroll, email, and network access rely on shared systems and contracts that cannot be severed instantly. To bridge this divide and ensure continuous operations, buyers and sellers use a formal contract that facilitates the transfer of services until the new owner establishes independence.
Defining the Transition Services Agreement
A Transition Services Agreement (TSA) is a legally binding contract between the seller (service provider) and the buyer (service recipient) in an M&A transaction. It outlines the operational and administrative support services the seller provides to the divested entity for a defined period after closing. The primary objective is to maintain business continuity by preventing a disruption of critical functions. This temporary arrangement allows the buyer to focus on strategic integration rather than establishing immediate back-office capabilities. The TSA sustains the historical level of support necessary for the business to function, and is not intended to optimize performance.
Why TSAs are Essential in Complex Transactions
The need for a TSA is pronounced in carve-out transactions, where a business unit is sold but remains reliant on the parent company’s centralized infrastructure. A divested portion of a larger organization typically lacks its own independent enterprise resource planning (ERP) system, data center, or human resources platform. Since the seller still owns these shared assets, they cannot simply hand them over, as they are used by the rest of the remaining business.
The TSA provides the buyer time to build, purchase, or migrate the acquired business onto its own independent systems without halting daily operations. Establishing new systems or securing software licenses can take many months, and the business cannot stop processing invoices or paying employees during that period. The typical timeframe for a TSA ranges from six to 24 months, depending on service complexity. This finite transitional period gives the buyer a structured timeline to execute their separation plan and assume full operational control.
Common Services Included in a TSA
The scope of a TSA is highly customized but often encompasses administrative and back-office functions centralized within the seller’s organization. These are the areas where the acquired entity has the least standalone capability and where immediate separation would cause the most disruption. The services provided continue the support the divested business received as part of the seller’s enterprise.
Information Technology
Information Technology (IT) is consistently the most complex and frequently included service in a TSA because the IT landscape is highly shared and interdependent. This includes access to the seller’s shared network infrastructure, email systems, data storage, and critical business applications like customer relationship management (CRM) software. Separating these systems is difficult because the divested entity’s data and operations are often commingled with the seller’s, requiring a carefully planned data migration and system cutover.
Human Resources and Payroll
Human Resources (HR) and Payroll functions are common components, ensuring the acquired business can continue to manage its workforce effectively from day one. Services include payroll processing, benefits administration, and access to the seller’s HR information systems (HRIS). Establishing new benefit plans and transferring historical employee data requires significant time and coordination to avoid disruptions to compensation and compliance.
Finance and Accounting
Finance and Accounting services ensure the continuity of core financial operations, such as general ledger maintenance, accounts payable and receivable processing, and financial reporting. The acquired business often relies on the seller’s accounting software and financial close processes, making it impossible to produce accurate financial statements immediately post-closing without this support. The TSA specifies the level of support for these activities until the buyer can implement its own financial controls and systems.
Procurement and Supply Chain
Procurement and Supply Chain support is often necessary when the divested business relied on the seller’s volume purchasing power or existing supplier contracts. The TSA allows the buyer to continue purchasing raw materials, supplies, or indirect services under the seller’s master agreements for a period. This is important when the buyer needs time to negotiate new contracts or qualify new vendors without interrupting the flow of necessary goods.
Real Estate and Facilities Management
Real Estate and Facilities Management services are included when the divested business occupies space in a building owned or leased by the seller, or shares common services within a larger campus. The TSA covers continued access to shared utilities, physical security, maintenance, and facility support. This allows the buyer time to execute a sublease agreement or relocate to a new facility without the immediate pressure of managing property services.
Key Structural Elements of a TSA
The contractual mechanics of a TSA are defined by structural elements that govern service provision and the commercial relationship. A primary component is the Service Level Agreement (SLA), which specifies performance standards for each service, such as system uptime and response times. These standards are typically benchmarked to the level of service provided to the business unit prior to the sale.
The duration of the TSA is explicitly defined, often consisting of a base term reflecting the buyer’s planned separation timeline. Agreements often include options for extensions, usually with increased fees to incentivize a timely exit. Establishing a clear pricing model is fundamental, with common approaches including cost pass-through, a fixed fee per service, or a cost-plus model incorporating a small administrative mark-up.
Governance requires designating Transition Managers from both sides to oversee the agreement’s execution. These managers serve as the main point of contact, ensuring service delivery meets the agreed-upon terms. The TSA must also include a clear dispute resolution mechanism, such as mandatory escalation to senior executives, to efficiently handle disagreements over service quality or scope.
Benefits and Risks for Both Buyer and Seller
TSAs offer distinct advantages and risks for both parties. For the buyer, the primary benefit is securing business continuity, protecting the value of the acquired asset by preventing operational failure. The TSA reduces the immediate integration burden, allowing the buyer to phase the complex work of establishing new systems over a manageable timeline. A significant risk is the ongoing dependency on the seller, which limits control and flexibility. Sharing systems also introduces data security and privacy risks requiring meticulous management.
From the seller’s perspective, a TSA facilitates a cleaner financial separation by making the business unit saleable without its own back-office functions. Providing services generates revenue during the transition period, typically covering costs and sometimes including a small profit margin. However, the seller assumes the risk of ongoing liability for service performance and potential resource drain, as personnel must continue supporting a business they no longer own. Remaining contractually linked to the buyer delays the seller’s full focus on their core remaining business.
The Critical Importance of the Exit Strategy
A TSA is inherently a temporary arrangement, and its success is measured by the buyer’s ability to successfully exit the agreement and achieve full independence. The exit strategy must be planned meticulously from the earliest stages of due diligence, detailing specific milestones for transitioning each service. This plan should include the timeline for standing up new systems, migrating data, and training personnel to assume the functions currently provided by the seller.
Failure to plan a deliberate exit can lead to “TSA Creep,” where the transition timeline extends indefinitely, increasing costs and prolonging the seller’s involvement. TSA Creep often results from poorly defined scope or underestimating the time required to build standalone capabilities. To prevent this, TSAs typically include clauses that impose escalating fees for mandatory extensions, incentivizing the buyer to complete the migration on schedule. The agreement must also define the process for early termination, allowing the buyer to stop receiving a service as soon as they are ready to assume it independently.