Transition Services Agreement: Everything You Need to Know
A transition services agreement determines the scope of services one company should provide to another when there is a change of ownership. 3 min read
2. Length of the Agreement
3. Benefits of a TSA
A transition services agreement determines the scope of services one company should provide to another when there is a change of ownership.
Transitional Service Agreement (TSA)
A transitional service agreement is created when a company is sold to another company, but the selling company is required to continue providing certain services to the buying company. The selling company lends its expertise to the buying company for a specified amount of time. This is often done so that the buying company can get comfortable with their new business capabilities and begin to confidently operate on their own.
The agreement should detail what services the selling company needs to provide the buying company, such as IT professionals, HR, accounting, and other business operation processes. An example would be if a large auto manufacturer were to sell one of its divisions to a smaller auto company. The transition service agreement would detail that the larger company should support the smaller company for a period of time by providing accounting, IT, and HR services to that company. Generally, a TSA is pretty straightforward part of selling a company.
Length of the Agreement
A TSA can be fairly short if the services being provided are not complex. For instance, if the new company only needs administrative help, the agreement could be fairly short. It would detail the time frame when services are to be provided, along with rates going forward after this period, if this is an option. Many of these agreements also contain a clause that states that there are no formal performance standards for the selling company.
If the services being requested are more complex, the resulting service agreement can be much lengthier. For instance, if the buying company requires the help of many different industry experts to get on their feet, the agreement could contain provisions for different service levels and variable fees. it should also include the scope of work being offered, along with requirements for privacy and data security. A TSA is a common arrangement when the buying company does not yet have key individuals hired, such as an upper management team or key technicians. The selling company offers the time and expertise of their existing team until the selling company can find their own team.
A TSA is also a common agreement when a company is purchased by a less sophisticated team. The new company may have already chosen their leadership team, for instance, but they need to flesh out their back office team. Another example of when a TSA would be useful is when a large company chooses to create a separate company from one of its divisions. The larger company supports the newly-formed company for a period of time until it is fully formed.
Benefits of a TSA
A transitional service agreement can become unwieldy to enforce and manage if it is not created correctly. A common issue is when the scope of services provided is not well defined. This tends to result in disputes between the owners of the two companies as to what services are owed. When written correctly, on the other hand, a TSA can offer a few key benefits:
- A smoother transition of assets and infrastructure
- Faster closing times and reduced legal costs as a result
- End-state solutions that benefit both parties
- A clean separation of the previous owner from the company
- Reduced error and transitional costs
When TSAs are unclear, it can result in a battle that drags on for much longer than needed or expected. The TSA allows for a much quicker financial close during the transitional period; this doesn't have to wait until the buyer can take full responsibility for the company's critical services.
When writing a TSA, be sure the following parts are clearly explained and defined:
- The scope of services offered
- The fees for these services
- Fees for any additional services that are out of the main scope
- The duration of the agreement
- Whether renewal of services is available
- The process to follow if there are disputes between the buyer and seller
- What happens to the TSA once the business can take control of all of its own responsibilities
divestiture-compendium-22315.pdf">Deloitte conducted a survey of 148 executives who had been part of a company carve-out or divestiture. They found that 87 percent of these companies had created a transition services agreement as part of the transition process.
If you need help with your transition services agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.