Transitional Services Agreements

The legal framework

A transitional services agreement (TSA) is a contract under which one party, usually the seller, continues to provide defined services to the other for a limited time after a transaction. It is used where the acquired business depends on the seller's systems and people, for example in a carve-out from a larger group, and cannot operate on its own on the day of closing.

There is no specific statute for TSAs. They are ordinary service contracts governed by the general law of obligations, and their quality depends on drafting. They are signed alongside the share or asset purchase agreement and are often attached to it as a schedule. In some cases, the TSA runs in both directions, because the buyer also provides services to the seller.

What a TSA contains

Scope. A list of services, each with a description. Typical services are IT systems and software access, finance and payroll, HR administration, facilities, and the use of trademarks, domain names and email addresses during a rebranding period.

Service levels. The standard to be met, so that expectations are defined and not assumed. A common reference is the standard at which the seller supplied the service to the business before the deal.

Price. Often at cost or at cost plus a small margin, which is transparent and reduces disputes. The agreement states what is included and how third-party costs are passed on.

Duration and extension. A fixed term per service, with extension options. Migrations usually take longer than planned, so a realistic term and a right to extend, perhaps at a higher price, avoid a cliff edge.

Exit. The plan for the end of each service: return or migration of data, handover of accounts, and wind-down of licensed IP. Planning this at the start is much cheaper than negotiating it at the end.

Data protection. If the seller processes personal data of the business on its behalf, there must be a data processing agreement under Article 28 GDPR, and transfers of personal data must be lawful. Where the seller remains a controller, the allocation of roles should be explicit.

IP and brand use. Where the business keeps using the seller's brand or software during the transition, the terms should mirror a controlled trademark or software licence: a limited right, quality control and a firm end date.

Liability and governance. A cap on liability suited to the value of the services, a procedure for escalation, and named contacts on both sides.

In practice

A group sells its distribution subsidiary to a private equity-backed buyer. On closing, the subsidiary still runs on the group's ERP system, its payroll is processed in the group shared-service centre, and its products carry the group's brand.

The parties sign a TSA covering three services. The ERP access is provided for nine months with a right to extend by three months, at cost plus a small margin. Payroll is provided for six months, and the buyer has to give notice by a set date to avoid a gap. The brand may be used on existing stock for twelve months under a limited trademark licence, subject to quality control, with a firm end date and an obligation to sell off or relabel remaining stock.

At the start, the buyer lists the dependencies as part of its due diligence, in a data room, and asks whether any contract with a third-party software vendor needs consent for the seller to provide access to the buyer. The seller's licence for the ERP system does indeed restrict use by third parties, so the parties obtain the vendor's consent as a condition to closing. They check the key contracts with the help of contract review, and the portfolio platform shows which registered trademarks and domain names are covered by the licence and which need to be transferred.

Frequently asked questions

Why is a TSA needed?

A business rarely separates cleanly on closing. A TSA keeps essential services running so that the acquired business operates without interruption while the buyer builds its own arrangements.

How long should a TSA last?

Long enough for a realistic migration, which is often longer than first expected. A fixed term per service with extension options is usual.

Who pays for the services?

Normally the buyer, often at cost or cost plus a small margin. The agreement should be clear on what is covered and how third-party costs are passed on.

Does a TSA need a data processing agreement?

If the seller processes personal data on behalf of the business, yes. Article 28 GDPR requires a written agreement between controller and processor.

How this connects

A TSA is one of the documents in M&A and due diligence. It follows from the deal described in M&A for Growing Businesses, and the dependencies that it addresses are identified in due diligence.