Transitional Service Agreements (TSAs) are a crucial part of the merger and acquisition process and are used when an organization is sold to another company. They are designed agreements to bridge the gap between the closing of the deal and the complete transfer of services or operations from the seller to the buyer without interrupting the continuity of operations. In this blog, we’ll understand what TSA is and what its benefits are. 

What are Transitional Service Agreements? 

A transitional service agreement (TSA) is an agreement made between buyer and seller companies so that the purchasing company might receive a set of services from the selling company for a certain amount of time to minimize disruptions in the workflow. These services could be anything from hiring HR services to financial ones. 

TSA has become a popular option for the buyer to get operational support from the purchasing company. A TSA is immensely helpful in outlining the conditions of the transition till the point of time when the buying company is capable enough to handle departments within themselves. 

What are the benefits of transition service agreements? 

The popularity of transition service agreements (TSAs) is due to their benefits. Here are some of the benefits of transit service agreements: 

• Smooth transition  

TSAs can help you make a seamless transition during the merger and acquisition process. It ensures that there is continuity in the operations of the business. 

• Assists in the integration period  

With TSA, it provides buyers the time to integrate the acquired business with the existing operations and processes for a smoother transition. 

• Minimised risk  

TSA allows the buyer to rely on the seller’s expertise and infrastructure for a specific period. TSAs can help you mitigate the risks related to transitioning to the new business environment. 

• Value generation

TSAs generate value for both sides of the transaction. Both sides want to return to operations after the transaction, and TSA facilitates this.

What are the challenges related to TSA?

There are certain challenges and limitations faced by buyers and sellers related to TSA: 

• Terms and conditions  

Negotiating the terms and conditions of the services can be challenging in TSA as both buyer and seller have different goals and expectations. Buyers want to have flexible TSA terms, while sellers want clarity on the end date of service provision.  

• Price  

The price of the services provided by the seller has to be accurately priced as it ensures that they can get fair compensation without underpricing. While buyers want transparency and clarity in cost to avoid overpaying. 

• Performance levels 

There are high chance that TSAs might not include detailed service-level agreements. Making a deal and negotiating service levels can be complex and even time-consuming, as the service providers might feel less motivated to adhere to performance requirements in short-term agreements.

• Incorrect assessment of services 

Sellers have chances to inaccurately assess the services required after the acquisition process which results in delays, excessive costs, and even disruption in services.

Best practices for TSA 

• Define services early. 

It's best to be clear on services early on. Initiate discussions regarding transition services after the M&A process to ensure clarity on service scope and costs. 

• Establish the right team. 

Creating a cross-functional team means having stakeholders from both seller's and buyers' organizations oversee TSA planning and execution. 

• Focus on speed 

Instead of focusing on overly ambitious performance, it's best to prioritize speed and efficiency so that you can speed up the whole transition process. 

• Prepare for the post-TSA phase.  

It's best to have advance planning for what the post-TSA phase would look like to you. It is for you to decide whether you should build, outsource, or terminate functions post-TSA and develop a carefully crafted exit plan considering interdependencies and stakeholder inputs. 

Conclusion  

A transitional service agreement (TSA) is an agreement made between buyer and seller companies that ensures a smooth transition during significant business transactions. With smooth transactions, minimized risks, and value generation, the benefits of TSA are many. However, with benefits come challenges such as terms and conditions or inappropriate prices. Hence, it's best to define services early, focus on speed, and prepare for the post-TSA phase.