When a company sells part of its business, the thrill of new opportunities can be accompanied by uncertainty for the organization that is changing owners.
That’s where the Transition Service Agreement (TSA) comes in. This critical contract ensures that essential corporate services, like technology, accounting and other infrastructure support, will continue uninterrupted after the sale. The buyer typically pays for the seller to provide these services over a limited period of time while the divested business establishes its own capabilities or migrates to the structure of a new parent organization. A big transaction could contain hundreds of TSAs that help facilitate a faster deal closing and allow company leaders to focus on core business activities.
Sounds exciting, right? In reality, TSAs aren’t as flashy as some other deal components. So, both buyers and sellers sometimes underestimate their impact and miss out on the chance to do them well. This can create business disruption, legal turmoil and, worst of all, financial risk in the transaction. On the flip side, well-done TSAs can set the stage for fast, smooth transitions. A side-by-side comparison of two example carve-outs illustrates what a solid TSA looks like, and the best practices for building one that properly aligns risk and cost.
| DEAL A – WEAK TSA | DEAL B – STRONG TSA |
| NEGOTIATION TEAM | |
| TSA negotiations are led by the investor deal team with third-party consulting support The portfolio company operating team is not included | The integrated negotiation team includes the operating team, third-party consulting support and investor resources Executives with TSA experience lead the negotiations |
| SELLER SUPPORT OF TSA EXIT | |
| There is no incentive or penalty for the seller to facilitate TSA exit The buyer is on its own for the TSA exit effort The seller can passively respond to requests vs. being accountable to deliverables and timelines | The buyer and seller jointly develop a detailed separation plan within 120 days of closing The seller receives financial incentives if separation completes in less than two years TSA fees decrease if separation is not completed within 30 months |
| TSA EXIT STRATEGY & DESIGN | |
| The business’ future technology design is embedded into the TSA, providing limited flexibility to change post-closing | Subject matter experts provide future state options, and buyer/seller agree on the exit strategy |
| TSA GOVERNANCE | |
| TSA relationship managers are assigned, but the buyer has limited ability to influence seller delivery and prioritization There is no defined mechanism for engaging senior management to resolve disputes | TSA relationship managers from both the buyer and seller hold monthly meetings Functional representatives from both parties hold bi-weekly meetings A steering committee with senior executives from both sides quickly resolves issues |
| EMPLOYEE TRANSFERS | |
| Shared associates are given the choice to join the buyer or continue working for the seller No leadership roles are transferred, so the buyer has limited knowledge of corporate and shared service functions | 100+ shared resource roles are identified for transfer to the buyer Critical leaders transfer to the buyer and spearhead additional employee selections |
| SYSTEM TRANSFERS | |
| The buyer receives all applications that are dedicated to the divested business The buyer receives copies of some applications shared between the parent and divested business | The buyer receives all applications used to run the existing business (both dedicated and shared) The seller copies all systems onto a buyer-managed data center |
| DATA TRANSFERS | |
| The seller is not obligated to transfer data specific to the divested business There is no defined timeline or performance level for data transfer | At least three years of data (or longer if there are regulatory requirements) is provided for all systems transferred to the buyer The seller must remove transferred data from its systems |
| LICENSE TRANSFERS | |
| Software licenses are not considered an asset of the divested business and not transferred | Seller assigns active licenses to buyer wherever possible Buyer and seller share the repurchase cost of licenses that cannot be transferred |
| TRANSITION APPROACH | |
| Negotiations assume a “big bang” transition approach, with all system separation occurring at one time | The seller allows reverse integrations to support business processes until all applicable systems are transferred |
| FEE STRUCTURE | |
| Annual rates apply for high-level services (Infrastructure, App and Desktop Support) There is a limited allowance for system-level TSA terminations The buyer bears all costs of transitioning to a standalone environment | Annual rates apply for specific IT services The buyer and seller establish a process for partial terminations after closing The buyer and seller share the cost of transferring systems |
Best Practice #1: Get the Right People in the Room
As our examples show, the right negotiators and leaders can change the course of a carve-out. Start early and negotiate the TSA alongside the Asset Purchase Agreement (APA), with leadership from experienced executives who understand how the two agreements work together. Include the operating team, too, since they will be implementing the terms agreed in these contracts.
To set up for a successful implementation phase, assign executive sponsors from both the buyer and the seller to ensure that transition activities are clearly defined and maintained against competing business priorities. Then, establish a separate steering committee of key leaders that will guide the program and resolve execution roadblocks.
Best Practice #2: Plan for a Phased Transition
When it comes to technology and business processes, never try to do everything at once. Rather than planning a “big bang” that migrates all systems simultaneously (or leaving it out of the TSA altogether), reduce your risk with phased release schedules that allow for well-planned, sequential implementations.
The technology transition should be tied to the buyer’s readiness, so allow ample time for establishing a new organizational design, defining accountabilities and training functional teams to support the transition timelines. Limit complexity by making very minimal changes from the seller’s operating environment at first, so that the business can remain focused on serving customers and growing profitability.
Best Practice #3: Spell Out Post-Close Commitments
You know a TSA has been done well when you see the roles of the seller’s resources defined up front (after all, they’re the key to making any transition happen). For starters, the buyer should have a say in selecting employees who will be transferred, since they will affect the company’s long-term success. Both parties should agree on high-priority positions to be transferred, and the seller should identify several candidates for each one. Then, the buyer should select the best talent from those options—and will need a hiring pitch to win them over.
The seller must also commit to providing appropriate service from its retained employees to support the TSA execution. Create a contract with protections for assigning capable, knowledgeable and available resources, as well as Service Level Agreements (SLAs) that pinpoint acceptable performance and penalties for unacceptable performance. Specify a process for raising performance or other issues if they arise, including the option to go to a third-party mediator if needed. With a well-designed TSA, the buyer and seller both have sufficient skin in the game to follow through on their obligations.
In executing hundreds of carve-outs and acquisitions from both sides of the negotiating table, FCM leaders have seen it all. Building and implementing effective TSAs has even become one of our specialties—and it’s had a huge impact on our clients’ success. The stories of these two sample carve-outs illustrate what we’ve learned above all: that devoting time and attention to the TSA early on will pay dividends later, when it accelerates your transition and puts money back in your pockets.
