5  TSA – Transitional Service Agreement

TSA – Transitional Service Agreement

by | 20. November 2023 | IT-Glossary-EN

Transitional Service Agreement (TSA): regulating the transition when buying a company

When buying or selling a company, the buyer and seller often agree on a Transitional Service Agreement (TSA). This is an agreement that provides for the previous owner to make certain services available to the new owner for a certain period of time. This article explains what a TSA is and what needs to be considered when drawing it up.

What is a Transitional Service Agreement?

When a company is purchased, the new owner must take care of all internal company services themselves once the contract has been concluded. This includes tasks such as accounting, human resources and maintaining the IT infrastructure. However, it is often the case that the new owner is not yet in a position to do this at the beginning. However, setting up your own structures for these tasks takes a lot of time. For this reason, it is common to agree a transitional service agreement.

This provides for the previous owner to continue to provide the relevant services for a certain period of time. In the meantime, the new management can set up its own structures. As soon as it is in a position to manage the relevant tasks on its own, support from the previous owner ends. The TSA serves to ensure the smooth transition of business processes and the uninterrupted operability of the company.

In which cases is a TSA useful?

In many cases, a TSA is not necessary when purchasing a company. If the relevant services were previously provided internally and the entire business is purchased, it is usually possible to continue to perform these tasks without any problems. A TSA is therefore usually used when only a single department or a single company within a larger group is up for sale. In these cases, it is not unusual for other departments or other companies that are not part of the sales business to provide the relevant services.

In this case, the transition is difficult as completely new structures have to be established. It therefore makes sense for the previous parent company to take over these tasks until the sold part of the company can take care of them independently. TSAs are not only important when acquiring companies. They can also be useful when changing a service provider or a software product. This ensures that the previous provider continues to perform its tasks until the successor can put its own systems into operation.

What is important in a transitional service agreement?

When concluding a transitional service agreement, it is very important to formulate the contractual content clearly and unambiguously and to include all necessary content in the agreement. It is not uncommon for considerable disputes to arise after a takeover as to the extent to which the previous owner must pay for the relevant services. It is very important to precisely define the services that the seller must provide. The costs that the buyer must pay are also an important part of the contract.

In addition, it makes sense to agree a fixed fee from the outset for services that go beyond the agreed scope of services. The contract term is also very important and should be precisely defined. In addition, the partners should contractually stipulate options for an extension. Finally, it is important to define the billing modalities. In the event that differences of opinion arise between the parties involved, it makes sense to name an arbitration body. Finally, the contract should specify how the handover of the tasks is to take place as soon as the buyer is in a position to take them over themselves.

TSAs of New Media Service GmbH

New Media Service GmbH offers comprehensive services for Transitional Service Agreements. It analyzes the entire IT environment as well as all projects, programs and product launches that are being planned. As part of this, it creates a due diligence report. On this basis, she works with the client to develop all the services that are to become part of the transitional service agreement. It carries out a cost comparison for services that are suitable for outsourcing. Finally, it provides assistance with the takeover of the new system landscape.