Transitional Services Agreement
A transitional services agreement is a contract under which the seller keeps providing services to a business it has sold — IT, payroll, finance, compliance, access to a licence or a platform — for a period after completion, at an agreed price, until the buyer can run them itself. It is what makes a carve-out possible: the unit can be sold before it is fully separable, and the TSA covers the gap.
- Also known as
- TSA, Transition services agreement, Transitional arrangements
- Used at
- carve-outs of divisions, sales of businesses that shared a parent's infrastructure, and fintech deals where the target operated under the seller's licence, platform or sponsor-bank arrangements
- Binding
- yes — a services schedule with service levels, a price, a term, extension rights and an exit plan for each service
- Typical term
- six to eighteen months, with extensions at a rising price to discourage the buyer from staying; some regulated services run until the buyer's own licence or arrangements are approved
- Typical price
- cost plus a margin of 5–15%, or the seller's internal allocation; "at cost" for the first months, rising after
- Parties
- the seller (as provider), the buyer (as recipient), the carved-out business's management caught between them, and sometimes third-party vendors whose contracts must be extended to cover the buyer
How a transitional services agreement works in practice
A corporate sells a payments unit that ran on the group's core systems, used the group's payroll and HR, reported through the group's finance function and processed under the group's scheme membership. The buyer cannot rebuild all of that before completion, so the seller agrees to keep providing it for a year: the unit's transactions keep flowing through the group's platform, its staff are paid by the group's payroll, its compliance reporting is prepared by the group's team. Each service has a schedule: what exactly is provided, to what standard, for how long, at what price, and how it ends.
The TSA is the seller's least favourite document — it keeps a business it has sold inside its systems, with its risks — and the buyer's most underestimated one, because the exit from each service is a project. The discipline is to write the exit plan into the agreement: for each service, the milestones by which the buyer takes it over, the seller's help with the migration, and the price escalation if the buyer overruns. Regulated services need their own timetable: a unit processing under the seller's licence must have its own, or the buyer's, approved before the TSA can end, and the regulator will want to see the plan.
For the carved-out business, the TSA period is the integration in reverse: it is being separated from one parent while being joined to another, and its management runs both projects at once.
Example
A bank sells its merchant-acquiring unit to a payments group for €120m. The unit's transactions run on the bank's processing platform, its staff are on the bank's payroll, and it acquires under the bank's scheme licences. The TSA runs twelve months: processing at cost (€2.1m a year) with two six-month extensions at cost plus 15% and 30%; payroll and HR at €180,000; scheme sponsorship until the buyer's own principal membership is approved, with the bank's consent to extend if the schemes are slow. The buyer's migration takes fifteen months — the schemes approve in month eleven, the platform migration finishes in month fifteen — so it pays €2.1m for the first year and €1.2m for the three-month extension. Without the TSA the bank could not have sold the unit at all; with a TSA that had no extension terms, the bank could have switched off processing in month twelve.
Common mistakes
- A TSA written after the sale agreement is signed, when the seller's leverage is gone and the buyer's needs are unknown. - Services described by name ("IT support") rather than by what is actually done, so every request is a dispute. - No exit plan per service, so the TSA ends and the buyer is not ready. - A regulated service with a fixed end date the regulator does not control. - Pricing at cost forever, so the buyer never leaves and the seller runs a business it sold.