Why Good Transition Services Agreements Are Important
A Transition Services Agreement (TSA) is, in general, an outsourcing agreement between a seller and purchaser. The purpose of a TSA is to ensure a smooth, uninterrupted transition of services or activities during and following the transfer of ownership or operations of a business or project without interruption or stoppage. The TSA provides continuity in the business and operations and can also provide a post-closing income stream to a seller.
If you are an owner-operator, you may also be familiar with this type of agreement as a “Training & Transition” agreement. In either case, business owners and leaders often fail to recognize that a poorly written or drafted TSA can lead to customer dissatisfaction, misunderstandings, interruption to services, and ultimately disputes. The good news, however, is that a well-drafted TSA can easily address these potential issues.
The Case for Transition Services Agreements
Anytime any a business or part/division of the business is sold to another company, there is a chance the company acquiring the division or business may not have the needed processes/systems, personnel or immediate access to resources necessary to best utilize their newly acquire business entity. In such an arrangement, the purchaser will need to rely on the Seller to maintain the continuity of the business on a short-term or temporary basis. The terms and conditions of this temporary arrangement can be covered in a TSA, and the terms of the TSA can be an integral part of the overall transaction..
Businesses that Could Benefit from TSAs
Ultimately, there are more businesses than we could list here that could benefit from using a TSA, but here are a few specific examples of companies and/or business divisions, large and small:
- Information Technology Firms/Service Providers
- Manufacturing Companies
- Logistics Management Firms
- Insurance / Warranty Claims Processors
- Purchasing and/or procurement
- Electrical Facilities
- Mortgage processing companies
- Management Companies
Tips for Purchasers
If you are a purchaser looking to hire a business attorney to draft a TSA, here are some things to keep in mind:
- In general, you should try to negotiate a long-term TSA on economic terms that allows you to terminate for convenience on short notice.
- Ask for a definitive fee schedule for all services included in the overall price, and prior approval for any extraordinary expenses incurred for emergency or extra work.
- Make sure 3rd party services are disclosed, readily accessible and subject to approval.
- In general, a robust, broad in scope TSA is the goal.
Tips for Sellers
As you might imagine, sellers will have some different priorities with a TSA. These include:
- Balance maximum post-closing income against need to pursue other business opportunities.
- Protection of your existing vendor and 3rd party relationships.
- Minimal knowledge transfer during the transition period that limits access to systems, technologies, and intellectual property.
- Focus responsibilities and limit liability under the TSA.
There are many more things a business attorney can do for your small business besides draft a TSA. If you have any additional questions about your service agreements or contracts, or if you wish to discuss other related legal issues, call Stephen Rizzieri at 214.434.1017 or fill out the form on our law firm site today.