What to Know About Transitional Services Agreements
Understanding a TSA can help firms anticipate challenges and smooth the M&A process.
This article is sponsored by Velocity Global.
Developing a transitional services agreement, or TSA, is a common step during the mergers and acquisitions process. While TSAs are routine, they are still complicated, time-consuming and not always well-received by a buyer or seller.
Before your firm drafts a TSA, there are essential elements and challenges you must fully understand. Below are a few commonly asked questions surrounding TSAs. Understanding them can help firms anticipate challenges and smooth the mergers and acquisitions process.
Transitional Services Agreements
Organizations use TSAs when the company, or a part of the company, is sold to another firm. A TSA outlines a plan for the selling company to hand over controls to the buyer. It typically covers critical services such as human resources, IT, accounting and finance, and any relevant infrastructure. TSAs are valid throughout a predetermined time frame—typically around six months.
The TSA negotiation period is critical. A poorly defined TSA results in disputes between the buyer and the seller around the scope of services.
The Challenge for Buyers
One of the most stressful elements of a TSA for buyers is the lack of immediate control over employees and business operations. For example, during the transition period, buyers do not have 100% autonomy over new employees, and they cannot hire new employees. Buyers must also rely on sellers to take on liability of new employees, creating additional complexity.
“The transitional services agreement negotiation period is critical. A poorly defined TSA results in disputes between the buyer and the seller around the scope of services.”
The Challenge for Sellers
Just like buyers, TSAs create challenges for sellers because they contractually link the seller to the buyer beyond the transaction closing date. During the transition process, sellers must use internal HR, payroll and accounting resources for existing and new employees, even after the sale date.
TSA Alternatives
TSAs are common, but they are certainly not the only way to ensure a smooth transition. An International Professional Employer Organization, or International PEO, enables companies to complete the transaction without a TSA.
An International PEO makes managing employee transfers, payroll and other essential international M&A considerations far less overwhelming for firms. Companies can bypass TSA complexities by partnering with an organization that offers proven alternatives like an International PEO.
This story originally appeared in the March/April 2020 print edition of Middle Market Growth magazine. Read the full issue in the archive.
Rob Wellner, Velocity Global’s senior vice president of revenue, draws on 12 years of experience in capital markets to help organizations expand internationally, including using Velocity Global’s International PEO service to overcome challenges associated with global M&A. Learn more at VelocityGlobal.com/acg.
