Transition services agreements (TSAs) are often an integral part of a transaction when a buyer or a seller needs to use the other’s services, infrastructure, or resources for an agreed-upon period of time after an acquisition.
The following is a list of key considerations for both buyers and sellers in connection with negotiating a TSA.
- Definition of Services. The definition of “services” should include all the services the parties agree will be included as transition services. The schedules should also set forth the length of time the services will be provided, and any specific fees for each service. A party that is receiving services should consider adding a “catch-all” phrase to ensure that any services that are necessary for the operation of the business in the 12-month period prior to the closing will be included, regardless of whether or not the services are accurately listed on the schedule. The parties should also document any specifically agreed-upon exclusions to the definition of services.
- Standard of Care: Historical Performance. Although standard services agreements usually contain a standard of care requiring the service provider to use professional, commercially reasonable or best efforts, services being performed under a TSA should also be required to conform to or exceed the existing service levels prior to the closing. This is especially important for the buyer, so it can stand up the business it is purchasing immediately after the closing. This should include concepts like the quality and scope of the services. To accomplish this, the TSA should contain language that not only says the services will be provided, but that they will be provided with the scope, in a manner, and at a level of quality and service substantially consistent with that provided by provider of the services during the 12-month period preceding the closing.
- Third-Party Costs. Third-party consents are often required in connection with the services required under the TSA. Any such third-party consents or costs in connection with the provisions of the services should be specifically set forth in the TSA. Depending on the overall transaction and the overall leverage of each party, either the seller or the buyer is responsible for such costs, or the parties may split the costs.
- Is Only the Buyer Receiving Services from the Seller, or Will the Seller Also Require Services from the Buyer? Some TSAs provide for both the buyer and the seller to provide each other services for a period of time after the closing. It’s important to determine the responsibilities of each party and make sure the needs of each party with respect to the requested services are met.
- Indemnification. Although indemnification is a standard concept included in most services agreements, it is typical for TSAs not to include indemnification provisions. It’s important to remember that the TSA is for the provision of transition services—the party providing the services is not a typical service provider, but is simply providing access to and use of services necessary to run the business for a period of time after the transaction. If an indemnification provision is included in a TSA, it should be narrowly tailored.
- Limitation of Liability. As with indemnification, since the services are not being provided by a true service provider, it is typical for a TSA to include unqualified (as opposed to capped) limitations of liability. Note that a party may request a carve-out for the other party’s willful cessation of the services because the actual performance of the services is essential in connection with a TSA.
- Operational Understanding. In order to properly paper the necessary services and the business deal under a TSA, it’s important to understand what is being purchased, what services will be needed after the closing, and how long the services will be needed. It’s key to walk through the TSA schedules with the client’s business team to ensure the schedules adequately reflect the services the parties need and the expectations of each party in connection with such services.