Transitional Service Agreement (TSA)
Definition - What does Transitional Service Agreement (TSA) mean?
A transitional service agreement (TSA) is made between a buyer and seller and contemplates having the seller provide 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.
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.
Divestopedia explains Transitional Service Agreement (TSA)
Transitional service agreements can be extremely difficult to manage if they are not properly defined. Usually, poorly drafted TSAs result in disputes between the buyer and the seller centered around the scope of services to be provided.
TSAs should ensure the following key points are fully defined:
- The fee for the general scope of services and additional charges for services beyond the scope;
- The term of the agreement and any available renewal terms;
- The dispute resolution mechanism to deal with discrepancies between the buyer and seller; and
- How the TSA will be transitioned once the buyer is able to assume the administrative responsibilities.