Posted in Corporate Law, Dealmaking, Deals, M&A, Uncategorized
Transition Services Agreements: overview and new developments
A key component of some M&A transactions is the Transition Services Agreement, or TSA. The TSA essentially answers the question: what services is the seller required to continue providing to the buyer, for how long, and upon what terms? The TSA is a separate legal agreement from the acquisition agreement, covering certain services to be provided from the seller to the buyer. The services provided pursuant to a TSA could include any manner of services, from accounting to IT, from management to HR. Of course, a TSA may have different terms depending upon the size of the transaction. When do I need a TSA? TSAs are most appropriate for two types of situations:
- Divestiture Transactions – in other words, the purchase and sale of part (but less than all) of one business to another. Most typically, a TSA will be appropriate when a larger company spins off or sells a division to a smaller company that does not have the infrastructure or in-house support to immediately absorb and support the division (in the converse situation – a larger company purchasing part of a smaller company – the larger company would likely already have the in-house capability to support the division).
- Key Person Transactions – in other words, a complete purchase of one business by another, where the selling business is run by, or intricately involved with, a key person who will eventually be leaving. The most common example of this is the Founder-CEO who started the business from nothing and has a very large degree of oversight and involvement with many different divisions. If the Founder-CEO is being bought out with an eye towards retirement or his/her next startup, then he/she will do significant damage to the purchased business by leaving immediately. A well thought-out and carefully-drafted TSA that methodically transitions and disentangles the Founder-CEO from the business over an appropriate time period will tend to preserve the most value.
- annual gross revenues of at least $25 million;
- annually buy, sell, receive, or share for commercial purposes the personal information of 50,000 or more consumers, households, or devices; or
- derive 50% or more of annual revenues from selling consumers’ personal information.