Transition Services Agreement Practical Law

A key component of some M&A transactions could be the Transition Services Agreement, or TSA. The TSA essentially answers the question: what services will be the seller necessary to continue providing towards the buyer, for how long, and upon what terms?

The TSA is really a separate legal agreement from your acquisition agreement, covering certain services to become provided on the seller for the buyer.

The services provided pursuant with a TSA could include any method of services, from accounting to IT, from management to HR. Of course, a TSA could have different terms dependant on the size of the transaction.

When do I require a TSA?

TSAs are best fitting for two sorts of situations:

Divestiture Transactions – quite simply, purchasing and sale of part (but below all) of 1 business to a new. Most typically, a TSA will probably be appropriate each time a larger company spins off or sells a division to your smaller company without the infrastructure or in-house support to right away absorb and secure the division (inside converse situation – a bigger company purchasing portion of a smaller company – the more expensive company would probably already have the in-house capability to secure the division).

Key Person Transactions – quite simply, an entire purchase of 1 business by another, the spot that the selling clients are run by, or intricately included in, a vital person who may ultimately be leaving. The most common demonstration of this would be the Founder-CEO who started this company from nothing and contains a very large degree of oversight and involvement with plenty divisions. If the Founder-CEO is now being bought out with an eye fixed towards retirement or his/her next startup, then he/she can do significant damage to your purchased business leave immediately. A well thought-out and carefully-drafted TSA that methodically transitions and disentangles the Founder-CEO on the business over a proper time period will often preserve essentially the most value.

There is, obviously, no reason in having a TSA in a total sale or acquisition without an important person, since every one of the seller’s assets, divisions, and services are belonging to the buyer indefinitely, and integration can proceed on the purchaser’s timeline.

What’s the pro and con utilizing or not by using a TSA?

When deployed poorly, a TSA can distract owner’s post-transaction focus for over necessary and basically turn into nuisance (all things considered, within the case of a divestiture, the owner is spinning the division off in order that it can concentrate on other things).

Another dangerous manifestation of a TSA is that it can be a very effective tool of procrastination – it could give buyer and seller who continue to have some disagreements ways to “kick the can around the road” on some extremely important decisions (decisions that will not be procrastinated).

When used properly, however, a TSA can lead to some faster close, in addition to a smoother and less costly transition. This part – the “when used properly” part occurs when you’ll desire to consult with a professional corporate attorney, and your other advisors within the transaction.

Below, I will discuss some of the concerns and questions that you’ll desire to specifically contemplate for your Transition Services Agreement.

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