James David Williams
Transition Services Agreements
When a business is acquired, there is often a period of time during which the new owners want the old owners to teach them how the business operates and to ensure that the business does not suffer while the new ownership gets up to speed. We are now seeing a rise in such arrangements in SaaS and E-Commerce transactions too. To facilitate this ongoing working relationship between the buyer and seller, the parties negotiate and sign a Transition Services Agreement (TSA).
Mechanically, a TSA will be an exhibit or appendix to the stock or asset purchase agreement and will look like a shortened version of an employment or contractor agreement. It will specify the ongoing duties of the seller and lay out how the seller will be compensated.
While TSAs are short documents, there are a few key terms to be negotiated. The first is how long the agreement will last. It could be that only a few days are needed for a successful transition; it could be that a few years are necessary (a period of a few months is most common). There could also be a provision that allows the buyer to call upon the seller even after the agreement expires under certain circumstances.
The second is the scope of the seller’s ongoing services. These may be as limited as periodic check-ins or as substantial as overseeing a business unit, team, or division. In SaaS deals, a seller’s ongoing services could include introductions to key clients or in-depth meetings concerning how existing sales funnels are set up. In E-commerce deals, a seller’s ongoing services could be personal conversations to hand off key supplier relationships or consulting on advertising campaigns. The circumstances of each transaction are unique, and this is a term that will vary widely.
The third is how the performance will be judged. While it may be tempting to rely on vague legal jargon, greater specificity is preferable when possible. The best way to do this can be to measure performance against predefined metrics, which links closely with the fourth negotiated term below.
The fourth is the payment structure. The seller could be compensated based on a number of metrics: time; commission; revenue targets; etc. The key here is to align incentives so that both the buyer and the seller work to make the ongoing relationship successful. Also, make clear when payments will be made—weekly, biweekly, monthly, quarterly, or annually.
The fifth is the extent of access to the seller’s knowledge and processes. A buyer purchased assets in the transaction, but what should the seller’s obligation be to demonstrate how those assets work? This could come up in relation to customized software, sales funnels, customer support processes, or any number of other things. Again, the clearer you can be upfront the better things will be later.
Given the sheer number of permutations for finalized TSAs, it is impossible to set forth any iron-clad rules, but both buyer and seller will be more satisfied with the transaction if these main issues are addressed during the negotiations. If you need any assistance in negotiating a TSA or an entire acquisition, we will be glad to help. We represent both buyers and sellers and have experience across industry sectors. To schedule a meeting, contact us at firstname.lastname@example.org.