Key takeaways
- A TSA is a contract where the seller provides defined services to the buyer for a fixed period after closing, at cost or a modest markup, while the buyer builds independent capability.
- TSAs are most common in carve-outs, PE platform sales, and transactions where the seller retains another business that shares systems, staff, or vendors with the sold entity.
- Every TSA service should have a defined scope, a fixed price, and a hard termination date. Open-ended TSA obligations with no exit have cost the seller months of unexpected operational burden.
- Sellers underestimate TSA complexity. A six-month TSA for IT, HR, and finance services can consume 20–30% of a senior executive's time and create ongoing legal exposure if services are performed carelessly.
- The buyer's Day 1 readiness plan determines how long the TSA needs to be. Buyers who have not planned their independent operations will pressure the seller for TSA extensions.
6–12 months
Typical TSA duration in middle market transactions
15–25%
Transactions that require at least one TSA extension
$200K–$600K
Estimated cost to the seller of managing a 12-month TSA for a $20M transaction
Day 1
When TSA obligations begin, immediately upon closing
Most M&A discussions focus on what happens before closing: diligence, negotiation, financing. Less attention goes to the operational reality that begins the moment the deal closes. For many transactions, particularly those involving a partial sale, a PE platform sale, or a business being carved out of a larger organization, the seller does not simply hand over the keys and walk away. They are obligated to keep certain functions running for the buyer while the buyer builds independent capability.
That obligation is governed by a transition services agreement. The TSA specifies what the seller will provide, for how long, at what cost, and under what terms. A well-drafted TSA protects both parties. A poorly drafted one creates liability, conflicts, and unexpected cost for the seller long after they thought the deal was done.
When a TSA is necessary
TSAs are not required in every transaction. They are most common when one or more of the following conditions apply:
Situations where a TSA is typically required
Carve-out from a larger entity
When a division, subsidiary, or product line is being sold separately from the parent company, shared services like payroll, IT infrastructure, legal, and finance must be temporarily provided by the parent while the carved-out entity builds standalone capability.
PE platform company adding or selling a subsidiary
When a PE-owned platform company sells a subsidiary or divests a business unit, the shared ERP, HR systems, insurance, and vendor contracts may require temporary continuation.
Founder retaining another business
When a founder is selling one business but retaining a related entity that shares staff, systems, vendors, or physical space, the sold entity needs those shared resources formalized.
Buyer acquiring but not yet operationally ready
When a strategic buyer or PE firm does not have the internal infrastructure to absorb the acquired business on Day 1, they require the seller to maintain certain functions temporarily.
IT system migration time
ERP migrations, particularly from a shared system to a standalone system, often take 6–12 months. During that period, the seller may need to continue operating the acquired entity on the existing system.
If there is any shared infrastructure between the sold business and any entity you are retaining, assume a TSA is required. Discovering undocumented dependencies after closing creates disputes, cost, and potential breach claims.
Structuring a TSA that protects the seller
Sellers often view the TSA as a buyer-protection document. It is equally, and in many cases more importantly, a seller-protection document. A TSA with clear scope, defined pricing, and hard exit dates limits the seller's ongoing obligation. A vague TSA with undefined scope and rolling extensions turns into an unpaid consulting engagement.
Essential TSA terms the seller must negotiate
Defined service scope
Each service is described with specificity: not "IT support" but "maintenance of the shared ERP system and provision of user access for up to 45 named users." Vague scope creates disputes about what is and is not included.
Fixed pricing
The TSA should specify how each service is priced, either at direct cost plus a defined markup (typically 5–15%) or at a fixed monthly fee. The seller should not provide TSA services below their actual cost.
Hard termination dates
Each service has an independent termination date. The buyer cannot extend IT support simply because they have not finished the ERP migration. Extensions require seller consent and additional compensation.
Limitation of liability
The seller's liability for TSA service failures should be limited to the fees paid under the TSA, not the consequential damages that could flow from a service interruption. Without this cap, a system outage during a TSA period could create open-ended seller liability.
Exit planning obligations on the buyer
The buyer should be contractually required to develop and execute an exit plan for each TSA service. Buyers who have no obligation to exit the TSA will use it indefinitely.
Dispute resolution
Define how TSA disputes are resolved, and by whom, before they arise. TSA disputes are operational, not just legal, and benefit from a defined escalation path.
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The most difficult TSA services are IT and finance. IT TSAs drag on because ERP migrations take longer than planned and IT staff get pulled into both the TSA obligations and the seller's own operations simultaneously. Finance TSAs create confidentiality exposure: if the seller's accounting team is producing financials for both the seller's retained business and the sold entity, data segregation requires active management.
Day 1 readiness and TSA length
The single most important factor in TSA duration is how well the buyer has prepared for Day 1 independent operations. A buyer with a detailed integration plan, pre-selected vendors, and a migration timeline will need a shorter TSA. A buyer who has not done integration planning will need a longer one, and that longer TSA will cost the seller more.
Sellers who want shorter TSAs should begin pushing for buyer Day 1 readiness during diligence. Ask the buyer for their integration plan. Ask which services they will need from a TSA and for how long. A buyer who cannot answer those questions is not ready to close, and the TSA they negotiate will reflect that unreadiness.
"A founder sold a $25M business unit that shared an ERP system with two retained entities. The TSA specified 12 months of ERP access at a fixed monthly fee of $18K. At month 11, the buyer had not completed their migration and requested a six-month extension. The seller agreed to a three-month extension at a higher rate. The total TSA period was 15 months and generated $310K in fees, but consumed roughly 30% of the CTO's time and created two billing disputes that required outside counsel to resolve. The seller's assessment afterward: the TSA fees did not cover the true cost of providing the services."
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Disclaimer: Financial figures and case studies in this article are illustrative, based on representative middle market assumptions, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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