M&A Vocabulary – Understanding Experts: “Transition Service Agreement”

Transactions generally aim to enable the buyer to have full control over the target company (the so-called target) from the closing date. Therefore, after the completion of the transaction process, the seller should no longer have any influence on the target, and all information, including historical data, regarding the target company, its assets, and employees should be available to the buyer at that time and accessible only to them.

However, in a largely networked world, where a unified management of companies through a group-wide data management system is of crucial importance, it is becoming increasingly difficult to carry out such a comprehensive data transfer in a timely manner, especially if the target company is a subsidiary of an internationally operating corporate group.

In such a case, a “Transition Service Agreement” (TSA) is regularly required, which regulates the terms of service provision by the seller for a certain period after closing.

Here, a detailed recording of the processes required in the target company, the hardware and software used, and data storage is essential already during the due diligence. The buyer must examine, with regard to the legal framework applicable to them, particularly concerning data protection and GDPR, to what extent the seller can still access data, which services must be provided until a complete migration of data, what period is required until the completion of a technically and legally secure data transfer, and what quality level these services must meet. Especially regarding the quality level, the conclusion of “Service Level Agreements” is advisable, which, in addition to determining the quality and scope of unhindered access to data within the scope of service provision, also include agreements on response times for disruptions, necessary maintenance work, and penalties for non-compliant service provision.

In principle, these are services that can be charged by the seller to the buyer at market rates. Given the usually high relevance of the TSA for the buyer, termination options before the end of the planned period for the service provider should only be provided in exceptional cases. Rather, it is advisable to include provisions for cases where, unforeseeably, the time agreed upon by the parties for service provision is insufficient to complete the full data transfer.

For the sake of completeness, it should be noted that, in addition to the described case of data processing, other services can also be the subject of such a TSA, for example, the continued supply of certain components.

Similarly, constellations are conceivable in which the provision of services must be ensured by the buyer, as the seller has transferred the entire infrastructure to the buyer, but still relies on corresponding services or other support from the buyer for a certain period.

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