The Transitional Service Agreement, which is concluded between the seller and the buyer and usually has a term between six and twelve months, regulates exactly what this support should look like. Anyone who now thinks ‘That little bit of support for such a short time, the parties will surely agree’ – is mistaken. Our experience shows: a regulated transition period, during which the spun-off unit can access the familiar services for as long as necessary while establishing its own processes in parallel, tailored to the new challenges and goals, is crucial for a successful start into independence and prevents time-consuming and costly disputes between the parties. So what should be considered when designing a successful TSA?

1. Completeness and Level of Detail

A successful TSA should be complete and describe the required services as detailed as necessary while being as concise as possible. In case the seller is not a company in the service industry, they are often not accustomed to acting as such. In the interest of diplomatic negotiations, the buyer should take this into account and not demand an overly extensive catalog of services.

The drafting of the TSA takes place during the due diligence phase. At this point, the buyer is not yet aware of all the details about the target, which makes it difficult to claim completeness of the service description. At this point, the parties could agree on generalist approaches, such as that all services will be provided ‘in the same scope and quality as in the past twelve months’ and then supplement the TSA with explicitly required services.

Likewise, strict confidentiality rules usually still apply during the due diligence phase, and only a small circle of people on both sides is informed. Depending on the hierarchy level and technical knowledge of the negotiating team, this group of people often knows only a few details about the operational processes. This can not only negatively affect the creation of the TSA specifically, but also impair the entire business case if relevant information is not included due to lack of knowledge. To counteract this, we recommend involving a few selected people at the department level from both parties at an early stage. They know their processes best and can estimate, based on the integration capability of their department, which services will be needed for what period from the divesting unit before either independent takeover or integration into existing corporate services of the buyer can occur.

2. Duration and Termination

The contract must contain regulations on duration and termination. Depending on the structure of the deal, TSAs are already valid from the time of signing, but at the latest from closing (Change of Control / legal transfer), or Day1. Their duration is usually between six and twelve months, depending on the project scope and complexity.

Experience shows that during an integration, the acquiring unit can very early estimate which services can be quickly taken over and which, due to their complexity or dependencies, will only be transitioned to their own operations at a later date. Especially in the cost-intensive IT sector, it has proven worthwhile to structure the individual services and bundle them into packages that can be terminated independently of each other. If the acquiring unit invests some time here and starts thinking about the subsequent integration phase during the due diligence phase, cost-optimized results can be achieved. Of course, with measure and goal, it’s important to find a middle ground between overly fragmented packages that bring high administrative costs in implementation and billing, and insufficiently structured service blocks that lead to unnecessary additional costs.

3. Compensation and Payment Terms

Every service has its price. The clearer and more detailed the amount and conditions of the payments to be made are regulated in the TSA, the lower the risk of subsequent differences between the parties. In any case, the TSA should include the billing mode and payment formalities. Regarding the level of prices, there are different standards for setting them. The prices that the divesting unit has previously charged internally for the operation of the target can serve as a basis here, or for simplification, lump-sum service fees can be set according to current market prices. If the parties decide to bundle service package models as described in the previous sections, it makes sense to determine the prices for the individual packages considering the following aspects: complexity/effort for providing the service, expected duration of service use, and dependencies on other service packages. In addition to the conventional approach of billing according to services received, there are also payment models that provide for paying part of the costs at the beginning and paying out the remaining costs at the end of a successful TSA term as a bonus for the divesting unit. Here, accelerated implementation procedures for e.g., standalone activities are often incentivized.

4. Legal Review

It makes sense to have the TSA legally reviewed, just like other contract documents, before it is submitted for negotiations, for two reasons: Specialized MA law firms often already know the involved legal parties of companies that regularly conduct deals and are able to review and possibly adjust the TSA for the choice of wording and the legal precision of the demands before it is submitted to the other side for review. This simplifies the negotiation. Additionally, the law firm ensures that the chosen formulations will hold up in case of a legal dispute between the parties.

5. Compliance

The TSA has been formulated, reviewed, negotiated, and is now signed by both contracting parties. To think that one could now check it off and turn to the realization of the ‘important’ topics of the deal is unfortunately a misconception. The TSA now contains all the success-critical factors. However, to actually lead it to success, it is necessary to ensure its correct application and compliance during the agreed period. It is advisable to appoint a TSA manager on both sides of the contract, who will manage and evaluate the process of the services to be provided from the beginning and maintain regular communication. Here too, the involvement of the operational level must not be neglected, as they are capable of providing information about the quality and status of integration capability. Depending on the relationship between the parties, it can be helpful at this point to include explicit warranty and liability clauses in the TSA.

Conclusion

Even if the negotiations proceed harmoniously and the deal is satisfactory for both buyer and seller, the parties have opposing interests after the contract is concluded: the seller wants to divest the target as soon as possible and has no motivation to put further effort into it, whereas the buyer is still dependent on the seller’s services for a certain period before they can operate the acquired unit themselves. The TSA serves to regulate this conflict of interest and is therefore an elementary component for an MA or divestment deal. Our checklist shows that ultimately, there are not many points to consider for a successful TSA. As so often, the devil is in the details. For this reason, we recommend thinking through the mentioned points all the more thoroughly and investing time here, including involving specialized consulting.