Transition Service Agreements (TSAs) play a critical role in acquisitions across various industries. These agreements outline the terms whereby the divested company pays (or receives payment from) the parent company for continued access to essential services such as back-office, shared service operations, or production for a specified period after the transaction closes. The result is an interim period that links the parent and the divested company together and minimizes disruption to critical business processes until the two entities can operate independently.
In this article, we provide a perspective on effective transition services arrangements and considerations that can be applied to deals when developing and delivering TSAs as part of the acquisition process.
Origin and Purpose
The concept of TSAs emerged as businesses increasingly engaged in mergers and acquisitions to enhance operational efficiencies and gain strategic advantage. When a business is sold or divested, the acquiring company may not have the immediate capability to fully operate the newly acquired entity. TSAs serve to bridge operational gaps by allowing the seller to provide essential services to the buyer post-transaction and ensure business continuity to allow the buyer time to transition operations with minimal disruption.
TSA Key Objectives
The main objective of the TSA is to maintain operational continuity and compliance with applicable standards during the transition period.
Regardless of the deal type, several factors should be considered when addressing the TSA, including:
- Risks that impact value creation, ideally accounted for by the buyer post-acquisition.
- Capital and operating expenses are required to meet the investment during the hold period.
- Management of customer, vendor, or other business records and information management to maintain compliance with applicable regulations and data privacy laws.
- Development of a resource plan around the management of staffing resources during the transition, particularly if existing personnel will continue to provide services under the TSA.
Prepared sellers can benefit by planning early and developing a comprehensive TSA program ahead of time. This will typically involve:
- A list of required services
- Detailed costs
- Defined service levels
- Clear governance process for managing the TSA relationship
- Well-defined exit approaches that can quickly be socialized with buyers
In our experience, the investment in comprehensive planning greatly accelerates the TSA development process, reduces stress, and creates a sense of confidence in the potential buyer that the organization and its clients or customers will not be negatively impacted during the transition process.
TSAs should promote a collaborative environment where both the buyer and seller can focus on maintaining high standards of care while fulfilling their contractual obligations.
Considerations when Drafting TSAs
Drafting an effective TSA is a complex, time-consuming task and should not be underestimated. A well-drafted TSA can provide real benefits and reduce transaction costs for both the buyer and the seller. We recommend taking the following approach to developing the TSA:
- Partner with the business
- Understand costs
- Design solutions
- Identify requirements
- Define services (e.g., IT, HR, Finance and Billing, Administrative Functions, Logistics and Supply Chain, Legal, Marketing and Communications, etc.)
- Document services
When structured correctly, TSAs save time and ensure that the separation is smooth. Failure to carefully structure the TSA can significantly inhibit or delay the carve-out process and increase overall separation costs. Therefore, a structured approach to TSA development is critical.
Based on our experience, there are other key factors when developing the TSA. Certainly, the seller should clearly outline the specific TSA services as this will help to set expectations for both parties during the transition period. Both seller and buyer must also:
- Ensure all compliance including all services that must comply with legal requirements for data privacy.
- Determine how the TSA will enable seamless transition in customer or client services, including transferring business records and ensuring that continuity of service is maintained without disruption.
- Understand and agree to contract and payment structures for services provided during the transition, including how costs related to third-party services will be shared or incurred.
- Develop transition planning, governance, and control to track and monitor services as they exist in the TSA.
TSA Management
Due to difficulties associated with managing TSAs, it is our view that these arrangements should only be used for the most critical functions to support business continuity and minimize disruption to the business, patients, and customers.
Based on our experience across multiple transactions of various sizes, companies that excel in managing TSAs do several things:
- Plan early – Both buyer and seller focus on developing a divestiture plan that includes all major separation activities, key interdependencies, including legal and regulatory hurdles, operational and functional separation activities, cost reduction efforts, internal and external communications, and TSA development requirements.
- Resource appropriately – Both buyer and seller create two complementary teams to manage the TSA. The parent company representatives are designated as the “hand off” team while the purchasing side is the “receive and operate” team. This structure allows for clear roles, escalation pathways, and designated process owners to minimize business disruption for both companies.
- Foster a deal team and business collaboration – Developing workable TSAs requires an alignment between schedules and the legal agreement throughout the process so both documents are practical and support each other.
- Look at pricing and drivers – Buyer and seller approach the agreement with a clear understanding of the price and cost drivers. Clearly defining the cost components and assumptions used to calculate the price can accelerate, simplify the process, and develop exit strategies for both entities.
- Establish a governance approach – A TSA management structure between buyer and seller should be developed to help manage and maintain the post-close delivery of the services. Sellers will be focused on cleaning up the business of the remaining company and remaining business activities, while buyers will be focused on integrating the new business and may rely heavily on the services supported by the TSAs.
- Specify scope and duration – Plan exit and remove costs that were associated with the business that should no longer be incurred after the transition period. They begin with the end in mind, manage dependencies, stagger exits, and strike while the iron is still hot.
TSA Best Practices from Development to Day 1 Service Delivery Transition
Best practices are meant to guide the transaction and do not cover every business scenario or situation. Based on our knowledge and experience spanning the M&A landscape, deal size, and transaction complexity; to successfully navigate TSAs, it is our opinion that buyers and sellers should:
- Seek external support with transaction expertise to help mitigate risks and implement best practices
- Design with the end in mind
- Plan for unexpected and additional costs
- Implement temporary solutions where necessary
- Establish clear roles and responsibilities
- Detail people, processes, and systems planning across impacted service area(s)
- Determine systems risk profile
- Develop user access controls
- Implement data management controls
- Capture business intent for third party services and know suppliers and their contracts well
- Anticipate changes in legal requirements and operational environment that may arise during the transition and ensure that the TSA allows for adjustments, as needed
- Implement regular evaluation of service delivery to ensure that all operational needs are met to sustain operational standards
Conclusion
TSAs have become a vital aspect of the M&A landscape where a structured approach to ensuring operational continuity and risk mitigation associated with changes in ownership are key. As organizations navigate complex business and regulatory environments, the role of TSAs in facilitating smooth transitions remains crucial.
While essential, Transition Service Agreements are temporary arrangements required to facilitate a smooth transition. The most critical success factors for effective TSAs are:
- Early initiation: Commencement of creating the TSA creation as early as possible.
- Simplicity: Keeping the TSA simple and concise.
- Clear objectives: Create a clear understanding of the desired objectives.
- Leveraging expertise: Utilize proper functional scope experience.
Underestimating these complexities of TSA development, and the impact of technology, can significantly impact the success of the deal.
At Ankura, our professionals have worked on numerous significant due diligence opportunities and assisted clients in successfully overcoming TSA challenges. Our experience helps clients improve business alignment and organizational success, leading to successful transitions that benefit both buyer and seller.
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© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
