TSA – Transitional Service Agreement

What is a Transitional Service Agreement?

When purchasing a company, 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 they are not yet able to do so at the outset. Establishing dedicated structures for these tasks takes a considerable amount of time. For this reason, it is common practice to agree on a Transitional Service Agreement.

This provides for the previous owner to continue providing the relevant services for a certain period. Meanwhile, the new management can establish its own structures for them. As soon as it is capable of handling the respective tasks independently, support from the previous owner ends. The TSA serves to ensure a smooth transition of business processes and maintain the company's operability without interruption.

In which cases is a TSA useful?

In many cases, a TSA is not necessary when buying a company. If the relevant services were previously provided internally and the entire business is acquired, it is usually straightforward to continue carrying out these tasks. Therefore, a TSA is mostly used when only a single department or an individual company within a larger group is up for sale. In these cases, it is not uncommon for other departments or other companies that are not part of the sale transaction to provide the relevant services.

In this case, the transition is difficult because completely new structures must be established. It therefore makes sense for the previous parent company to handle these tasks until the sold business unit can manage them independently. TSAs are not only important when purchasing companies. They can also be useful when changing service providers or software products. This ensures that the previous provider continues to fulfil its duties until the successor can operationalise its own systems.

What content is important in a Transitional Service Agreement?

When concluding a Transitional Service Agreement, it is of great importance to formulate contract content clearly and unambiguously and to include all necessary content in the agreement. It is not uncommon for significant disputes to arise after a takeover regarding the extent to which the previous owner must provide the relevant services. It is essential to define the services to be rendered by the seller very precisely. The costs to be borne by the buyer for this also represent an important part of the contract contents.

Furthermore, it makes sense to agree on a fixed fee from the outset for services that exceed the agreed scope of services. The contract term is also of great importance and should be precisely defined. In addition, the partners should contractually stipulate options for an extension. Finally, it is important to specify the billing arrangements. In the event that differences of opinion arise between the parties involved, it is advisable to designate an arbitration body. Lastly, the contract should outline how the hand-over of tasks is to take place once the buyer is in a position to take them over themselves.

TSAs from New Media Service GmbH

New Media Service GmbH offers comprehensive services for Transitional Service Agreements. It analyses the entire IT environment as well as all projects, programmes and product launches currently being planned. As part of this, it prepares a Due Diligence Report. On this basis, it works together with the customer to develop all services to be included in the Transitional Service Agreement. It performs a cost comparison for services suitable for outsourcing. Finally, it provides assistance with taking over the new system landscape.