Transition services agreements, or TSAs, are used when an organization, or part of an organization, is sold to another company. This contract outlines continued services the seller will provide during a defined period—often about six months—to ensure an orderly administrative transition. These services can include HR, IT, accounting, finance, and other relevant infrastructure needs.
TSAs create a smoother transition for buyers who do not have the means to immediately absorb all aspects of the acquisition. At the end of the designated period (often when the purchasing company establishes an entity), the buyer is in a stronger position to provide the administrative services to their employees that the seller previously provided.
Benefits of transition services agreements
While TSAs provide a structured approach to business integration during M&A transactions, their benefits often come with significant complexity and overhead. Here are the key advantages they traditionally offer:
- Business continuity. Maintains critical operations and service delivery while the buyer develops internal capabilities
- Cost management. Allows buyers to leverage existing systems temporarily instead of immediate infrastructure investment
- Global compliance. Provides a framework for navigating international employment laws and regulatory requirements
- Deal acceleration. Enables faster transaction completion by allowing buyers to proceed before establishing all support services
- Workforce stability. Helps reduce employee concerns about job security and benefits during the transition period
However, these benefits often come with considerable challenges, including complex negotiations, extended timelines, and substantial resource requirements. For organizations seeking a more streamlined approach to international workforce management during M&A transactions, an Employer of Record (EOR) solution offers similar advantages with greater efficiency and reduced complexity.
An EOR solution can deliver these same benefits while eliminating many of the traditional TSA hurdles, particularly for organizations managing global workforce transitions. This alternative approach often proves more cost-effective and operationally efficient than traditional TSA structures.
How long do transitional services agreements last?
TSA timelines can vary but are often six months in duration. The length typically aligns with the buyer’s integration plan and can be structured with a “base” duration plus extension options.
Unlike outsourcing agreements and other transitional agreements, TSAs generally differ in one critical respect: “Neither party expects a long-term business solution from the agreement.” states reputable attorneys Julian M. Dibbell and Pooja D. Ramchandani.
While sellers prefer shorter timeframes to conclude transactions quickly, buyers often seek longer durations to minimize integration risks and ensure a thorough transition of operations. Many agreements include early termination provisions and extension clauses that require advance notice to establish flexibility while incentivizing efficient completion of the integration process.
Common challenges with transitional services agreements
While TSAs are common, they are not always well-received by both parties. TSAs bring with them complexities and complications that affect both the buyer and seller, so it’s crucial to assess and negotiate the scope of its components as early as possible.
Challenges for sellers
With TSAs, sellers must devote internal HR, payroll, and accounting resources to the process. This means that the transaction may close, but divestiture is not complete until all administrative ties are severed. In short, TSAs contractually link the seller to the buyer beyond the transaction close date. Other considerations include the following:
- Sellers maintain liability and responsibility for employees who are no longer part of their team.
- Sellers must divert internal resources to the buyer’s employees. Hard costs vary between transactions, but “soft costs” like administrative burdens compound quickly.
- The agreement creates accounting challenges, among other complications, which do not end in a “clean break.” Accounting challenges include employees’ compensation, benefits, and other essentials that are not carried on the seller’s records as expenses since they are not the end employer.
- Undocumented expenses misalign department budgets and cause accounting reporting issues, as the seller’s records are not set up to recognize these revenues and expenses.
Challenges for buyers
Buyers must identify which services are essential and ancillary, the service standards, and the actual costs of the sellers’ services. Also, buyers have little flexibility during the TSA’s timeline, which can create additional tension in an already stressful process. Other considerations include the following:
- Buyers do not have 100% control over new employees and cannot hire new employees
- Buyers must rely on sellers to take on the liability of new employees, creating additional complexity
Challenges for both buyers and sellers
The transaction process leads to confusion for both parties’ employees: Whom do they work for? When will they be integrated into the new company? The buyer is on a new path but is stuck in a legacy structure that can include HR, payroll, and other systems.
A common challenge when acquiring a company or part of a company is setting up payroll for transferred employees.
Establishing compliant payroll processes involves setting up a local bank account and creating a local legal entity such as a subsidiary or branch—which are far more time-consuming than many buyers assume.
Because of these financial and legal restrictions, TSAs are often a last resort for buyers who do not have the administrative bandwidth to take on the employer functions required to onboard acquired employees. They are usually negotiated last minute as well. This causes:
- A stressful situation for both buyer and seller
- An expensive deal for the buyer, as they are forced to agree to terms in order to close the transaction
- An ongoing relationship that neither party wants
Due to these factors, it is often not possible to fulfill the requirements to process local payroll in time for day one of a deal.
Key considerations for transition services agreements
When evaluating TSAs as part of an M&A strategy, organizations must assess several critical factors that influence the agreement’s effectiveness and impact on the overall transaction.
Service definition and scope
Organizations must precisely define which functions the seller will provide and for how long. This often requires extensive negotiation and documentation, particularly for complex international operations where service requirements vary by region.
Cost structure evaluation
The financial framework extends beyond basic service fees to include:
- Initial implementation costs
- Ongoing operational expenses
- Potential extension fees
- Hidden costs of management oversight
- Resource allocation expenses
Geographic requirements
International transactions demand careful consideration of:
- Local labor laws and regulations
- Data protection requirements
- Cross-border service delivery challenges
- Country-specific compliance obligations
Operational standards
Service quality expectations must balance:
- Pre-transaction performance levels
- Realistic transition capabilities
- Resource availability
- Knowledge transfer requirements
- Timeline planning
Organizations need to evaluate whether traditional TSA timelines align with their strategic objectives. While TSAs typically span 6-12 months, modern business environments often demand faster, more agile solutions for workforce transition and management.
In Deloitte’s 2024 M&A Trends Survey, 83% of executives anticipate increased M&A activity. While TSAs offer one option amid a transitioning company, these considerations shed light on alternative solutions like EORs that offer more efficient paths to achieving their M&A objectives, particularly for managing global workforce transitions.
How an employer of record assists in the transaction process
An employer of record (EOR) helps streamline the process, either as an alternative to a transitional services agreement (TSA) or as a longer-term solution for small headcount jurisdictions. This is especially beneficial for sellers with employees in countries that are not at the core of the transaction or who need a simpler way to transfer low-headcount employee populations.
An EOR provides multiple advantages during M&A transactions, including cost savings through economies of scale for supplemental benefits, expert guidance for local transfers and benefit matching, and streamlined employee onboarding processes that ensure compliance across jurisdictions.
This flexibility allows companies to adapt to changing needs during the M&A process, whether as a short-term bridge solution or a longer-term arrangement for smaller markets.
Learn more: What Is an Employer of Record?
Streamline your merger or acquisition with an experienced partner
Managing employee transfers, payroll, and other essential global M&A considerations is overwhelming for firms of any size—especially when drafting a TSA. Companies can leverage a global EOR to:
- Effectuate employee seniority without established entities
- Access supplemental benefits that meet purchase agreement requirements
- Ensure compliance with local labor and payroll regulations
- Gain extension of local HR expertise without in-house hiring
Partner with an experienced EOR to streamline commercial contracts, maintain compliance, and meet transaction closure dates. Velocity Global helps companies navigate mergers or acquisitions and can support your firm in successfully completing your transaction—without a TSA.
Contact Velocity Global to learn how we can help you navigate your merger or acquisition with ease, speed, and compliance.
Topic:
Global Growth
