Transition Services Agreement (TSA), also called transitional service agreements, are agreements between the buyer and seller in a divestiture or acquisition whereby the seller agrees to continue to provide services to the buyer on a temporary basis as a service provider in an effort to ease the transition. These agreements are used in mergers and acquisitions (M&A) where the seller agrees to supply goods or render services to the surviving entity until or after the deal is completed. Such agreements are utilized when the buyer is unable to meet the infrastructural or logistical demands of an acquisition independently. It sees applications mostly in divestitures where a larger company sells off a division to the acquiring company which may not have the infrastructural capacity to absorb such an acquisition independently in a short span of time post the completion of acquisition.
When Do You Need Transition Services Agreements?
A transitional service agreement is required if you are acquiring a certain division of a larger company and you do lack the resources to perform HR, accounting, management or other functions without requiring any external services. These agreements allow the buyer to acclimatize to the functioning of the newly-acquired division and gives them an opportunity to make alternative arrangements so they can continue functioning independently. Not every divestiture warrants a TSA, it is dependent on whether or not the buyer is acquiring everything including the assets of the division and whether the buyer is confident about being able to run it by itself from the get-go.
Inclusions in Transition Services Agreements
Transition service agreements can become hard to manage if they are not drafted effectively. An effective TSA would include detailed information about the scope of services, pricing mechanisms, and consequences of non-performance. You need to be as detailed as possible and try not to use vague phrases. Other aspects of a TSA include review rights, allocation of liability and the time frame. Transition service agreements are only one component of a mergers and acquisitions deal and don’t include all the terms and conditions one would typically expect to see in a contract such as warranties and disclaimers. Other terms included are standard such as effective date, names and types of the contracting businesses, and governing jurisdiction.
How to Draft Transition Service Agreement?
Procedure to draft transition services agreements:
- Define the effective date of the agreement.
- Identify the contracting parties by their names and addresses.
- Express who will be receiving the services and who will render them.
- Briefly describe the services the supplier is expected to provide.
- Establish the relationship between the surviving and dissolving entities and the circumstances of the acquisition or divestiture.
- Expressly define the scope of services in as much detail as possible, leaving no room for vagueness of ambiguity.
- Specify the consideration owed to the service provider and the terms of payment.
- Specify the date of termination of the contract.
- Specify what exactly would constitute non-performance or breach of the contract.
- Specify the remedies available to either party to resolve any disputes that may arise, possibly add an arbitration clause.
- Establish the law governing the contract.
- Have representatives of both parties sign the contract.
Benefits of Transition Services Agreements
Transitional service agreements must be handled with care as they are somewhat of a double-edged sword, in the sense that they can be very useful if used appropriately, but can prove to be detrimental to both parties if not drafted effectively. However, a well-drafted transitional service agreement offers the following benefits:
- It can lead to a faster close.
- Smooth transition.
- A more economic transition.
- A clean separation that would allow the newly acquired division to run at peak efficiency.
- It offers better end-state solutions.
However, an improperly drafted TSA could make the whole transition process a lot more complicated, a lot less smooth and much more expensive than total outsourcing. Therefore, it is critical to ensure that your TSA is well-drafted and includes detailed clauses that establish the scope of services, payment, and other important terms and conditions.
Key Terms/Clauses in Transition Services Agreements
Important terms in a transition service agreement example would include:
- Scope of services: This clause of the contract discusses the services that are expected with as much detail you can possibly provide.
- Payment and consideration: This clause discusses the consideration to be paid to the service provider and the terms of payment.
- Warranties and Waiver: While these clauses might not be as elaborate as in other contracts (due to being a part of a larger acquisition agreement), it is still important to have basic provisions for waiver.
- Confidentiality: For various reasons, you may choose to include a confidentiality clause in your agreement which ensures the secrecy of its contents.
- Data confidentiality: Now, with your relationship with the seller being completely redefined as one with a service provider, it is in your best interest to make provisions for data confidentiality, just as you would when you outsource your requirements.
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Transition Services Agreement
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