A strategic buyer wants to acquire our core product division but requires us to sign an eighteen-month Transition Services Agreement for IT, billing, and fulfillment. How do we price and structure this TSA so it does not trap our remaining team in unprofitable corporate support?

Question

Tyler Smith · Accepted Answer

A Transition Services Agreement is often necessary in a corporate carveout, but without careful structuring, it can quickly drain your remaining business of executive focus and operating profit. If your leadership team is bogged down resolving billing tickets and fulfillment logistics for an entity you no longer own, your remaining operations will suffer.

First, shorten the timeline aggressively. Eighteen months is excessively long for a middle market carveout. Push to limit the core TSA term to six to nine months, with the buyer retaining the option to extend for up to an additional three to six months only upon paying escalating financial penalties. Escalating rates, such as increasing the service fee by twenty-five percent for each subsequent quarter, create an urgent financial incentive for the acquirer to migrate operations onto their own systems quickly.

Second, never provide transition support at cost. Price all services on a fully loaded cost-plus model, adding a clear markup of fifteen to twenty-five percent on internal administrative overhead, technology licenses, and dedicated staff time. Define precise operational boundaries within the agreement, attaching detailed Service Level Agreements that replicate historical performance standards without committing to custom improvements or expanding workloads.

Third, designate specific administrative seats on your Accountability Chart to handle TSA deliverables rather than pulling core leadership into daily execution. Ensure the contract includes unambiguous mutual indemnification provisions, broad liability caps limited to the fees collected under the agreement, and explicit rights for you to terminate specific support services if the buyer fails to remit monthly service payments on schedule. A properly structured TSA protects your cash flow and ensures an orderly operational handoff.