Transitional Service Agreement

Business, Legal & Accounting Glossary

Definition: Transitional Service Agreement


Transitional Service Agreement


Full Definition of Transitional Service Agreement


A transitional service agreement (TSA) is a type of agreement made between a company’s buyer and seller. The seller agrees to provide certain services to the buyer at a predetermined price under this arrangement. Accounting, information technology, and human resources are examples of services that can be included, and the nature and scope of these services are specified in the sale agreement. TSAs can thus provide the necessary operational support to the purchasing company, which may not yet have the systems or framework in place to carry out these tasks.

The process of one company purchasing another is frequently bumpy and fraught with potential pitfalls. The buying firm may be taking a giant step forward in its business development by acquiring the selling firm, but the selling firm may have entire departments that are required to run the company that do not exist at the buying firm. A TSA outlines the transition conditions until the buying company is capable of implementing these departments internally.

Transitional service agreements are common when a large corporation sells one of its divisions or certain non-core assets to a less sophisticated buyer or a newly incorporated company with senior management in place but no back-office infrastructure.

A TSA can also be used in “carve-outs,” in which a large corporation spins off a division into a separate public company and then offers infrastructure services to the fledgling spinoff company for a set period of time. A properly executed transitional service agreement is analogous to a family in which the parents of a grown child pitch in financially to help their child establish himself or herself on his or her own.

As the name implies, the goal is to facilitate the transfer of ownership from one company to another, allowing the buyer time to establish its own departments of services that are currently being provided by the seller.

If transitional service agreements are not properly defined, they can be extremely difficult to manage. Typically, poorly drafted TSAs result in disagreements between the buyer and seller over the scope of services to be provided. In most cases, a well-crafted TSA will be custom-tailored to the specific circumstances of each situation.

TSAs should make certain that the following key points are fully defined:

  • The exact scope and nature of the services that the seller will be providing for the buyer. This is one of the most vital aspects of the entire agreement. The agreement may describe the seller’s services as “reasonable, substantial and/or satisfactory” or some other similar legal phrase. Will the seller merely provide a routine level of services, or will it be authorized to resuscitate one or more divisions for the buyer if necessary
  • The exact names of all parties involved. If the seller uses a third party for certain services, will the buyer do the same? Will the buyer enter into an agreement with just the seller, or will a third party also be named?
  • The fee for the general scope of services and additional charges for services beyond the scope;
  • The term of the agreement and any available renewal terms;
  • The dispute resolution mechanism to deal with discrepancies between the buyer and seller; and
  • How the TSA will be transitioned once the buyer is able to assume the administrative responsibilities.
  • The level of access that the buyer and seller will have to each other’s information and methodologies. Will the seller provide absolutely everything in its accounting division to the buyer, or just the key components? These details must be hammered out in the TSA.

In essence, a TSA states that the seller will assist the buyer for a set period of time. In the end, this type of agreement is a powerful tool that potential buyers can use to strengthen their position in their industry. TSAs essentially allow buyers to ride on the back of a portion of the selling company until they can establish themselves on their own terms.


Synonyms For Transitional Service Agreement


TSA


Related Phrases


Subordination Agreement
Seller Friendly Purchase Agreement
Reps and Warranties
Carve-Out


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Definition Sources


Definitions for Transitional Service Agreement are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th January, 2022 | 2 Views.