A transitional services agreement (TSA) is entered into between a buyer and a seller and provides for the seller to provide infrastructure support such as accounting, IT and human resources at the end of the transaction. TSA is common in situations where the buyer does not have the management or systems to absorb the acquisition, and the seller can offer it for a fee. Buyers and sellers need to agree on a clearly defined strategy for how the post-closing business will operate both immediately after closing and in the long term. Be prepared to identify the specific services that will be provided, the length of time those services will be offered, the appropriate service standards, and the applicable costs and expenses. Addressing these issues early will allow for cleaner development and fewer rounds of negotiation once the TSA is reduced to drafting. Although general audit rights are common in TSA, you should determine whether certain audit rights are required for the recipient of the service, regulators, or other third parties so that the recipient of the service can comply with its own policies or legal/regulatory obligations. A consumer goods company acquired a large spice company that was separated from its parent company. To ensure business continuity during the transition period, TSA services were put in place, but the duration of service was limited to only six months. Think of it this way: an ASD supposedly says, “Seller, you`re going to help the buyer for a while.” But what kind of “help” does the seller have? Here are some considerations to better understand how much time and effort should be invested in planning for ASD. Please understand that ASD is extremely unique to the situation. Parties to an TSA should understand whether there is personal data, a law on the portability and liability of health insurance or other sensitive or confidential information used in connection with the services provided.
If so, consider taking appropriate security measures for the buyer and seller and their respective employees and contractors. The design and management of transition service agreements to achieve a quick and clean separation has been saved It is common for ASDs to include arbitration clauses or clauses that require the parties to take legal action in the event of major service continuity issues; However, a buyer may not want to invest the time and resources to comply with these traditional dispute resolution options for anything other than the most egregious mistakes. Consider including escalation clauses that allow internal representatives of service providers and recipients to resolve continuity issues amicably. Determine if there is a need to improve business continuity or disaster recovery plans. Often, the seller has to rely on its own suppliers and service providers to provide services to the business after closing. Determine whether the seller has sufficient rights under its existing upstream agreements and licenses to provide the requested services itself, or whether third-party agreements and licenses need to be entered into or amended with the seller`s vendors and service providers. Consider the criticality and complexity of the services requested, as well as the cost and timing of entering into or amending agreements with third parties (bearing in mind that third parties may have reasonable leverage and little incentive to provide short-term or transitional services). .