A Transition Service Agreement (TSA) is an agreement between a buyer and seller whereby the seller contracts with the buyer its services and know-how for a specified period of time order to support and to allow the buyer acclimate to its newly acquired assets, infrastructure, systems, etc. The Transition Services Agreement defines the conditions under which the ceding company will provide, during the transitional period, the IT services provided to date to the divested company or to the foreign divested company to the ceding company. Essentially, the objective (i) must allow the operation to continue after the sale, without loss of quality and performance of IT services, and (ii) to prepare for the complete separation of the target of the selling group. Transitional service agreements are common when a large company sells one of its divisions or certain non-core assets to a less sophisticated buyer or a newly incorporated company where the senior management is in place, but the back office infrastructure has not yet been assembled. They can also be used during “carve-outs” where a large company spins out a division into a separate public company, and then offers the infrastructure services for a defined period of time. First, because the price of transition services, which can last several months and sometimes two or three years or more, is often high. Among the various factors that contribute to the functioning of the objective, information systems play a central role. Their complexity, the different elements (software, equipment, specific developments, etc.) and the data they process often complicate the organization of transition and separation. The development of an information system takes time, so it is recommended to create a contract for transition services to ensure the scope, quality and sustainability of these services after the transfer.
The objective of the transition service agreement for the assignee is to secure the transaction so that the divested business can benefit from the same IT services with the same level of quality as within the company or the ceding group. A transitional service agreement (TSA) is made between a buyer and seller and contemplates having the seller infrastructure support such as accounting, IT, and HR after the transaction closes. The TSA is common in situations where the buyer does not have the management or systems in place to absorb the acquisition, and the seller can offer them for a fee. In our latest point of view, “Fast Break – A way to design and manage TSAs to achieve a fast and clean separation,” Indira Gillingham, senior manager and Mike Stimpson, manager, with Deloitte Consulting LLP, provide practical advice for using TSAs to achieve a fast and clean separation. A TSA can accelerate the negotiation process and financial close by allowing the deal to move forward without waiting for the buyer to assume responsibility for all critical support services.