Key Takeaways

  • A transition services agreement (TSA) outlines the services a seller will provide to a buyer after a business sale to ensure continuity.
  • TSAs are common in mergers, acquisitions, and carve-outs where the buyer lacks immediate operational capacity.
  • The agreement should clearly define scope, duration, service standards, pricing, and dispute resolution processes.
  • Benefits include smoother transitions, reduced disruption, and faster deal closings.
  • Risks include unclear scope, hidden costs, and potential disputes if expectations are not well managed.
  • Best practices involve early planning, realistic timelines, and incorporating termination and extension provisions.

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. 

When to Use a Transition Services Agreement

A transition services agreement is particularly useful when the buyer needs immediate operational support that cannot be replicated in-house right away. Common scenarios include:

  • Carve-outs: When a division or subsidiary is sold and still depends on the parent company’s shared services such as IT, HR, payroll, or legal compliance.
  • Complex acquisitions: When business operations involve sophisticated systems or processes that require a gradual transfer.
  • Cross-border deals: When the buyer needs time to navigate local regulations, establish supply chains, or adapt to market differences.
  • System migration periods: When technology or enterprise resource planning (ERP) systems require phased implementation.

In these situations, a TSA prevents service gaps, maintains customer service levels, and minimizes operational disruption.

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. 

Key Components of a TSA

A well-drafted transition services agreement should include the following elements to avoid ambiguity and disputes:

  1. Scope of Services – Detailed description of the services to be provided, including any limitations or exclusions.
  2. Service Standards – Defined performance metrics, service levels, and response times.
  3. Pricing & Payment Terms – Fixed fees, cost-plus models, or per-service pricing, with provisions for additional charges outside the original scope.
  4. Duration & Extensions – Specific start and end dates, with clear criteria for any extensions.
  5. Governance & Dispute Resolution – Escalation processes, regular review meetings, and methods for resolving disagreements.
  6. Confidentiality & Data Protection – Safeguards for sensitive information and compliance with relevant regulations (e.g., GDPR, HIPAA).
  7. Termination Clauses – Conditions under which either party can terminate the agreement early.

Including these components ensures both parties have aligned expectations and clear contractual protections.

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

Risks and Challenges of a TSA

While a TSA can smooth the transition process, there are potential pitfalls if it is poorly structured:

  • Scope Creep: Adding services beyond the original agreement without adjusting timelines or costs.
  • Dependency Risk: Buyer becomes overly reliant on seller’s resources, delaying full operational independence.
  • Misaligned Incentives: Seller may have little motivation to prioritize the buyer’s needs post-closing.
  • Data Security Risks: Shared systems may expose sensitive information to unauthorized access.
  • Operational Delays: Lack of service level agreements (SLAs) can lead to performance disputes.

Mitigation strategies include setting measurable milestones, implementing regular progress reviews, and incorporating penalties or incentives tied to performance.

Frequently Asked Questions

  1. What is the main purpose of a transition services agreement?
    It ensures continuity of critical business functions after a sale until the buyer can fully operate independently.
  2. How long does a TSA usually last?
    Most TSAs range from a few months to one year, depending on the complexity of the services and the buyer’s readiness.
  3. Who typically pays for TSA services?
    The buyer usually pays, either through fixed fees, cost-plus arrangements, or other agreed pricing models.
  4. Can a TSA be terminated early?
    Yes, if both parties agree or if termination conditions in the contract are met, such as breach of obligations.
  5. What’s the biggest risk in a TSA?
    The most common risk is unclear service scope, which can cause disputes, cost overruns, and delays.

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