The final part of the acquisition process is referred to as the closing of completion. This is when the shares are transferred at the notary and the cork is allowed to come off the champagne bottle. It is also possible that no shares but a business unit is transferred (a carve-out), in which case there is also a closing.
After closing, for the buyer, the real work begins and the purchased business needs to be integrated. But how do you ensure a smooth transition and what if the business cannot stand on its own two feet on day one?
These problems are particularly acute in a carve-out, where the business unit can be difficult to disentangle from the seller. One solution to this is the transition service agreement (TSA). In this contribution, I discuss the use of the TSA in M&A transactions.
What is a transition service agreement (TSA)?
A TSA is a master agreement between buyer and seller in which the buyer and seller agree to provide services to the business or business unit being sold (the target company).
The TSA allows parties to complete the acquisition more quickly and prevents interruptions in the target company's business operations. The services generally provided under a TSA are IT, HR and accounting, but depending on the type of business, they can include many other types of services.
What agreements are included in a TSA?
Because the TSA serves as a framework agreement, it should contain the overarching agreements. The specific arrangements for the services to be provided are outlined for each service in a separate agreement called a service level agreement (SLA). The TSA primarily governs the roles and responsibilities of the parties involved and liability when things go wrong.
Teams and managers are designated at both the buyer and seller to keep everything on track. The parties also agree on the boundary conditions of the services to be provided (the scope) and what the price and payment terms for them will be. It is also arranged how and when the services will be phased out when the target company can stand on its own two feet and when the TSA ends.
What should you pay attention to when drafting a TSA?
The biggest challenge with TSAs (and SLAs) is getting it right and making sure there are no gaps in the services needed. For this, a good understanding of the business is crucial. It is also important to clarify everyone's roles and responsibilities and to build in a large degree of flexibility in case there are unexpected twists and turns, for example because more or fewer services are needed unexpectedly.
For both buyer and seller, it is important to anticipate problems. What if a third party does not cooperate, what if costs increase unexpectedly, what if a service violates the law or another agreement, what if the other does not (sufficiently) honor the agreements? A good TSA sets clear limits on everyone's responsibility and provides a procedure in case the parties cannot work it out together.
Transition service agreements are an excellent tool for ensuring a smooth business transfer, but their drafting should be done very carefully. In doing so, the involvement of specialists and people from the business is essential to create workable agreements.
