Understanding Transition Service Agreements (TSA) in M&A Deals
A Transition Service Agreement (TSA) is an agreement between a buyer and seller whereby the seller contracts with the buyer its services and know-how for a specified period of time in order to support and to allow the buyer acclimate to its newly acquired assets, infrastructure, systems, etc.
For example, a large car dealership may choose to sell off a division to a smaller, upcoming auto company, and part of their deal includes the large car dealership supporting the upcoming auto company with its HR, IT and accounting departments for six months or so. In theory, a TSA is pretty straightforward, and you would be correct to assume so.
A TSA is a fairly accurate business example of real life events: Mom and Dad help out with their son’s expenses for the first handful of months he is working, but pretty soon, he is able to take care of everything by himself. It’s not that a TSA is, on its face, complex; but it’s what lies within the TSA agreement that brings about many potential headaches and hiccups.
Think about it like this: A TSA ostensibly says, “Seller, you will help Buyer for a period time.” However, what is the nature of Seller’s “help”? Below are some considerations to help better grasp how much time and effort ought to be put into planning a TSA. As a note, please understand that a TSA is extremely unique to the situation.
The comments and questions below better represent “things to ask oneself,” not “this is what you must do in order to have a successful TSA”—other than the fact that everyone participating should be communicated with and the agreement should be detailed very well, of course.
- What is the scope of your TSA?
- Some agreements are very short-term, either out of necessity or convenience. Others might work better long-term. Still others might even operate better with a flexible TSA provision; something that defines a set period, but then allows the buyer company to call upon the seller company should something happen down the road.
- Who is the seller and who are third parties? Who is who? As the buyer, are you entering into an agreement with just the seller? What if the seller relies on and trusts in a third party; will you, as the buyer, do the same?
- At the expense of redundancy, the buyer is there to buy things, not make things. If the seller relied on a third party to create its accounting department, then the buyer might need to call upon those third party services as well. At this point, how long will the third party serve the buyer? Further, who pays for it?
- What is “performance of services”? Are these services simple/routine check-ups, or is the seller there to resuscitate a division if the buyer runs into a major roadblock?
- The agreement may describe seller’s performance of services as “reasonable, substantial, satisfactory,” or some other vague legal term, but this part of the agreement may be one of the most important aspects. To add even more gravity to the situation, the buyer and seller are unlikely to be able to predict every possible event. At the very least, there should be general agreements that utilize some form of specificity for the relationship between the seller and buyer. For example, the two parties may not be able to predict everything, but the buyer and seller can certainly agree to something like “Seller will provide repairs and consultation services up to $100,000/year for the following five years.” In such a case, the two parties can use this money cap as an anchor; this is much more clear than agreeing to something to the effect of “… repairs and consultation services for reasonable fees each year for the following five years.”
- How much access does each party have to the other party’s information and methodologies?
- A buyer may now own the seller’s accounting systems, but the seller’s employer that was the moving force behind it may still be with the seller. In that case, can the buyer “borrow” this employee’s expertise or straight-up hire him? Will the seller provide everything it has in its IT division, or just the major building blocks—in that case, what exactly did the two parties agree to in the acquisition?
Suffice it to say, a TSA is a great tool for a buyer company that is looking to put itself in a stronger position within its industry because it can piggy-back off of the seller’s already-established divisions/departments. What will be extremely important is investing the required time both with the opposite party and competent legal counsel to best prepare for actually learning and using these newly acquired systems.
