TSAs are critical components of most divestiture transactions, yet they are often underestimated or under-resourced. When thoughtfully structured, they provide a safety net for both buyers and sellers, allowing operations to continue smoothly while the buyer builds independent capabilities. But if mismanaged, TSAs can become sources of operational risk, cost overruns, and relationship strain.
To create value and avoid pitfalls, companies must approach TSAs with the same strategic intent and rigor as they do the divestiture itself.
What Is a Transitional Service Agreement?
A Transitional Service Agreement is a contractual arrangement in which the seller agrees to provide certain services to the buyer for a specified period after the deal closes. These services can include IT support, finance and accounting, HR management, supply chain operations, or even access to physical facilities and systems.
TSAs are particularly common when the divested business was tightly integrated within the seller’s operations and lacks standalone capabilities on Day 1. They act as a temporary bridge, giving the buyer time to build infrastructure, hire staff, or implement new systems.
Why TSAs Matter
From the buyer’s perspective, TSAs are essential to minimize business disruption post-close. Without them, the newly acquired unit might suffer service gaps that could impact customers, employees, or financial performance.
From the seller’s perspective, TSAs provide a smoother exit and may even serve as a source of short-term revenue. But they also introduce complexity and cost. Sellers must allocate resources to support a business they no longer own while managing their own strategic focus.
Striking the right balance—where both parties benefit—is the essence of a well-structured TSA.
Key Components of a TSA
- Scope of Services
Clearly defining what services will be provided is the most important part of a TSA. The scope should be specific, measurable, and aligned with the operational needs of the divested business. Vague or overly broad scopes lead to confusion and conflict. - Service Levels and Performance Standards
TSAs should establish service-level agreements (SLAs) that define performance metrics, response times, and quality standards. These SLAs help ensure accountability and prevent disputes. - Duration and Exit Strategy
TSAs should be temporary by design. A defined duration—typically 6 to 18 months—is essential, along with agreed-upon milestones for transitioning services to the buyer. Planning for early termination or extensions can also provide flexibility. - Pricing and Cost Allocation
TSA pricing must be transparent and reflect the true cost of service delivery, including direct and indirect costs. Sellers often use a cost-plus model to ensure fairness. Buyers should scrutinize charges and build TSA costs into their deal models. - Governance and Issue Resolution
Governance structures—such as joint steering committees—help monitor performance, manage scope changes, and resolve disputes. Regular reviews keep both parties aligned and proactive. - Data Security and Compliance
TSAs involve shared access to systems, data, and intellectual property. Robust data privacy, cybersecurity, and compliance clauses are essential to protect both sides and meet legal standards.
Common TSA Pitfalls
Despite their importance, TSAs are often treated as last-minute checklist items. This reactive approach can lead to misaligned expectations, hidden costs, and strained relationships. Common pitfalls include:
- Underestimating Complexity: Services like IT may involve hundreds of systems, licenses, and integrations.
- Unclear Ownership: Without clear accountability, TSA execution can stall or fall through the cracks.
- Delayed Planning: TSA discussions should start early—ideally during due diligence—not after the deal is signed.
- Lack of Flexibility: Inflexible terms can become liabilities if business needs change mid-transition.
- Neglecting Exit Plans: Companies that fail to plan TSA exits often find themselves extending agreements beyond what’s ideal.
Engaging experienced divestiture consultants can mitigate these risks by providing deep expertise in TSA design, negotiation, and execution. Their cross-functional knowledge ensures that services are scoped correctly, priced appropriately, and delivered with minimal disruption.
Best Practices for Win-Win TSAs
1. Start Early and Collaborate
TSA planning should begin as soon as a divestiture is considered. Cross-functional teams from both the buyer and seller should be involved to ensure all operational needs are captured. Early collaboration builds trust and avoids last-minute surprises.
2. Tailor Services to Strategic Goals
TSAs should align with the strategic intent of the transaction. If the buyer plans to integrate the business quickly, services should be minimal and short-term. If the business will operate independently, more comprehensive services may be needed.
3. Build Flexibility Into Agreements
Change is inevitable. TSAs should include provisions for modifying scope, pricing, or timelines in response to evolving business conditions. Flexibility promotes cooperation and reduces legal wrangling.
4. Use TSAs as a Catalyst for Separation Planning
The TSA should not be a crutch. It should serve as a roadmap for separation, with clear milestones for transitioning services to permanent solutions. Sellers should use TSAs to drive the exit, not delay it.
5. Maintain Strong Communication and Governance
Frequent communication, status tracking, and issue resolution forums help keep TSA execution on track. Governance structures ensure accountability and provide escalation paths when issues arise.
How Divestiture Consultants Add Value
Expert divestiture consultants bring operational, financial, and legal expertise to the TSA process. They understand the nuances of carve-out complexities and help translate business needs into practical, enforceable agreements.
Consultants can also run TSA workshops, coordinate between buyer and seller teams, and manage Day 1 readiness. Their ability to anticipate challenges and offer proven solutions can significantly reduce risk and speed up the transition timeline.
Transitional Service Agreements are not just a formality—they are foundational to the success of many divestitures. When structured strategically, they enable a seamless transition, preserve business continuity, and create a positive foundation for both parties post-close.
Whether you're a buyer seeking stability or a seller pursuing a clean break, the key to a successful TSA lies in early planning, clear communication, and smart execution. And with the guidance of experienced divestiture consultants, organizations can turn this often-overlooked piece of the puzzle into a powerful enabler of long-term value.
Related Topics:
Strategic Alternatives to Divestiture: When to Hold vs. When to Sell
Accelerating Value Creation Through Targeted Divestitures
Portfolio Optimization: Using Divestitures to Refocus Corporate Strategy
The Divestiture Timeline: Critical Milestones for Consultants and Clients
Post-Merger Divestiture Requirements: Navigating Antitrust Mandates