Transition services agreement, explained simply
When a division is sold, it cannot build its own IT, payroll and accounting overnight. The former parent provides them for a fee, commonly for 6 to 18 months, while the buyer sets up standalone functions.
Diligence reviews the list and pricing of services, service levels, duration and extension rights, and the exit plan. TSA fees are temporary and often differ from the long-term standalone cost, which is what EBITDA should reflect.
Services moving from the TSA to standalone
IllustrativeCoatings division of Pinecrest Industrial
The TSA must run long enough for the slowest function, usually IT, to be separated.
Worked example
| Coatings division, $ millions | Amount |
|---|---|
| TSA fee for 12 months (IT, payroll, accounting) | 0.9 |
| Estimated standalone cost after the TSA, per year | 1.6 |
| One-time cost to set up standalone systems | 1.2 |
Pinecrest Industrial is a fictional company. All figures are illustrative.
Diligence checks that the TSA period is long enough to complete the set-up, and that standalone EBITDA uses the full standalone cost and not the lower TSA fee.
Why it matters in a deal
TSA costs and the standalone set-up affect EBITDA, cash needs and integration risk. Underestimating them is a common carve-out error.
Red flags
- Services not covered by the TSA
- A TSA too short to build standalone functions
- TSA fees below the true future cost, which flatters EBITDA