Understanding Transition Service Agreement – TSA

A transition service agreement (TSA) is an agreement between a buyer and a seller in which the seller provides services and support to the buyer once the seller has sold his/her business so that the buyer can continue with business operations. It’s highly critical in mergers and acquisitions (M&A) to ensure that the business continues its operations just like before. Though understanding the concept of TSA is not that hard, it’s the terms and conditions of the TSA agreement that create challenges. In this article, we’ll understand the nuances of TSA. 

What are the benefits of TSA? 

There are several benefits of TSA: 

• Smoother transition process

The main purpose of TSA is to ensure that the small details in the transaction are not overlooked, thus facilitating smoother transactions. 

• Clearly define what is sold. 

Clearly outline what is being sold and retained after Divestment Separation. Establish clear transition plans for employees, customers, and suppliers to avoid any confusion later on. 

• Mitigates risk  

A TSA can help mitigate the risk associated with the separation process. By defining clear responsibilities for both pirates, you can ensure a smooth handover of assets and services. 

• Defined Cost Structures 

A thoughtfully designed TSA during M&A details the costs associated with the services offered, enabling both parties to plan and budget efficiently throughout the transition phase. This transparency can help prevent any unforeseen financial issues for both parties. 

• Maintains relationships with third parties   

If either party needs to keep depending on third-party vendors or service providers (like IT service providers or suppliers), the TSA can incorporate provisions that guarantee the continuity of these relationships throughout the transition period. 

What are the challenges that occur in crafting an effective TSA? 

• Crafting it in the eleventh hour 

The business is already disrupted after divisions, and crafting a TSA in the eleventh hour can make the matter worse.  

• Not consulting experts  

For a smoother transition, you need to involve the stakeholders of both parties to guide the process. 

• Miscalculating costs 

Crafting TSA includes minute planning that takes account of minute planning and analysis of loaded salaries, hourly rates, system contracts, and even third-party costs. Miscalculating such costs can result in lost value. 

• Poorly describing services  

TSA thoughtfully defines the scope and pricing methods. To avoid confusion, it’s best to write TSAs in a clear and thorough format, which will prevent a lot of hassle in the future. 

• Sacrificing efficiency for speed  

Crafting TSA means prioritising efficiency and not rushing into the process. Organisation creates the mistake of striving to transition off TSAs before they are actually ready for this, and this can result in unnecessary clean-up work and costs for key stakeholders.  

How do I overcome these challenges? 

• Envisioning the end state of the company 

The seller or buyer needs to envision the end goal of the company after the Merger Integration period has wrapped. Based on this, they can set goals.

• Budget accordingly  

Ensure that even minute costs are added to TSA. Remember that everything has a cost, from office space to executive time; consider all these factors. 

• Take expert consultation.  

It’s best to bring the best of the experts from legal and financial to IT and operational experts to ensure that all aspects of TSA are covered.  

• Clearly defining services

You need to clearly define services, deliverables, timelines, and expectations in well-understood industry terminology and, where applicable, provide detailed Service Level Agreements (SLAs). 

• Regular Communication and Updates 

Maintain frequent communication with all involved parties, including internal teams, external experts, and service providers. This can avoid any miscommunication in the process.

Conclusion

Transition Service Agreement (TSA) can be immensely helpful for companies who want to experience a smooth transition. There are several benefits of TSA, from a smoother transition process to having clarification on what to sell and defined cost structures to maintaining healthy relationships with third parties. Several challenges occur in the process of following the solutions mentioned in the article. Consult BML Ventures for various services, from business operations due diligence to the Transition Service Agreement (TSA).