Below is a summary of some of the key considerations and elements the parties should consider when preparing to enter into, and negotiating, a TSA.

1. Scope of Services

The TSA should clearly define the services to be provided, which may include IT support and systems access; finance and accounting functions; HR and payroll administration; facilities management; and procurement and supply chain support.

In our experience, to streamline TSA negotiations, it is advisable to prepare a detailed service schedule outlining each service, the method of delivery, and any dependencies as early as possible in the process. The Seller will already have a good understanding of what the business requires in order to operate and so liaising with any potential buyer to assess the delta between current services received by the business and those that the buyer will be able to provide immediately post-completion is critical. As part of the initial separation planning, thought should be given to reliance on third party providers and any relevant third-party consents and costs.

Delays often result from the parties leaving this process until the latter stages of the negotiations and often lead to last minute arguments around scope and, ultimately, costs.

2. Standard of Services

The agreement should specify the standard to which services will be provided. This is often aligned with the standard to which the seller (or its group) provided equivalent services to the business prior to completion – often within a specified ‘look back period’ (for example, six months prior to completion).

Where appropriate – including where certain services are of absolute criticality to the business and where the seller is a professional provider of certain of the transitional services – service levels or performance metrics should be included to ensure accountability and measurable outcomes. Consider whether service credits or other remedies should apply in the event of underperformance.

3. Duration and Termination

The TSA should state the term during which the services will be provided, which typically ranges from a few months to a year, depending on the complexity of the business and the buyer’s readiness to assume full operational control. The seller should have an awareness of the term during which it is realistically able to provide the services (with consideration given to any personnel constraints, the seller’s own short to mid-term strategic plans and any third-party constraints (such as licensing restrictions)).

Termination provisions should be carefully considered, including:

• Early termination rights (for convenience or breach);
• Extension mechanisms (if the services are required for a longer period); and
• Exit planning and handover obligations.

It is often the case that a seller will look to implement a fee ratcheting mechanism which will be triggered by any extension to a service term.

4. Charges and Payment Terms

The TSA should set out the fees payable for the services. Fee arrangements vary, however they tend to be either:

• Fixed (e.g. a monthly fee);
• Variable (e.g. based on usage or time and materials); or
• At cost or cost-plus (to reflect the seller’s actual expenses).

Payment terms, invoicing procedures, and any applicable VAT or tax considerations should also be addressed.

5. Liability and Indemnities

As with any other commercial agreement, liability provisions are a critical part of the TSA. From a seller’s perspective, it should consider what level of liability it is willing to accept under the TSA and factor such assessment into the wider commercials, ensuring that any liability risk is proportionate to the nature and value of the deal.

The TSA should clearly set out the parties’ general liability caps as well as any exclusions (for example, indirect and consequential loss, or increased caps for certain breaches including those of data protection or confidentiality obligations).

6. Conclusion

A TSA is a vital tool in facilitating a smooth transition following a business sale. It is important for the parties not to lose sight of the fact that a TSA is intended to facilitate the swift and successful transition of the business away from the seller.

Early planning, clear drafting, and legal advice are crucial to ensuring that the agreement is fit for purpose and aligned with the commercial objectives of both parties.

If you are considering the sale or acquisition of a business and would like assistance in drafting or negotiating a TSA, please do get in touch.