Transition Service Agreement: What You Need to Know?

International acquisitions can be an effective way to grow your business, increase your reach and gain access to new markets.

But acquiring companies overseas can quickly get complicated — especially when you don’t yet have a legal entity set up in the target country. 

Learn more about Transition Services Agreement with CXC

One way to get around this is to sign a transition services agreement, or TSA. This is an agreement between you (as the buyer) and the seller, in which they agree to continue providing certain services following the purchase.

This can give you, the buyer, time to set up the infrastructure you need to stand on your own two feet — while ensuring a smooth transition period for the employees of the purchased entity. 

Read on for our full guide to TSAs for international acquisitions, including the most important elements to include in your agreement, and some of the challenges that a TSA can cause for both sides. 

What is a TSA?

A transition services agreement (or transitional services agreement) is a contract between two companies, which is made when one company acquires all or part of another.

The purpose of a TSA is to stipulate which services the seller company will continue to handle after the sale. A TSA often covers functions like IT, accounting, finance, real estate, payroll and HR. 

TSAs are particularly useful when one company acquires an entity in a different country, since the buyer may not yet have a legal entity there. This means they might not be ready to take on these processes from day one of the acquisition. 

TSAs are also common when large enterprises sell off one of their divisions or subsidiaries to a smaller company.

In these cases, the seller might have whole departments that are needed to run the company, which the buyer doesn’t have.

By signing a TSA, the seller agrees to continue using its resources to run the sold entity while the buyer sets up the infrastructure it needs to take over. 

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The benefits of using a transition services agreement for HR

Here are some of the ways that a TSA can make a big event like a merger or acquisition easier on both companies’ HR teams. 

  • Clarifies timelines for everyone: A TSA should clearly outline the timeline of the transition process, including the dates by which any key steps should be completed. This helps everyone understand what’s happening and what the next stages will be. 
  • Gives employees peace of mind: It’s only natural for employees to worry about their job security when their company is purchased. On top of this, they may have concerns about how internal processes like payroll and benefits will work under the new ownership. A TSA can act as an official set of guidelines that explain how the transition will work — which can help to reassure employees. 
  • Helps ensure compliance: Acquiring a company — particularly one in another country — always comes with certain compliance-related challenges. A TSA can help lay out the changes that the purchasing company will have to make to remain compliant once the transitional period is over. 
  • Outlines compensation: TSAs should outline how each company will pay the other for HR work related to the transition. This should include details about the rates, overtime rates, and payment methods that will apply. 

What to include in your transition services agreement

A transition services agreement is an important document that acts as a set of guidelines for both parties. Here are some of the most important elements to include in a TSA.

1. Transition timeline

TSAs are usually in place for a set period of time — which should be agreed upon and clearly stated in the TSA itself.

For example, the two companies might agree that the seller will provide the buyer with certain services for six months after the date of the sale. 

2. Performance standards

A TSA should also outline the standards that each party is committed to upholding. It should detail the metrics that will be tracked, who is responsible for tracking them and what success will look like.

It’s important that this is as specific as possible, to ensure that each party knows exactly what it is agreeing to. The TSA might also state what the consequences will be if the agreed-upon standards are not met.

3. Data security

Confidentiality and data security can get complicated when one company is absorbing another.

This is because when the transaction closes, the seller may be classed as a third party (not a group company), even during the transition process. This means that there are certain rules around sharing data that both parties have to follow. 

Since this can very quickly get complicated, you should always include all requirements related to data security in your TSA.

We also strongly recommend consulting with a lawyer who’s familiar with data protection laws in the relevant countries to ensure you’re acting compliantly. 

4. External service integrations

Many companies outsource services like IT, payroll or HR to external providers. And the TSA needs to detail exactly how any partnerships with these providers will be affected by the acquisition. 

For example, let’s say that the bought entity employs international workers through an international employer of record (EoR). Will this arrangement continue once the transaction has been completed? When will the buyer entity take over the contract with the EoR? All of this should be detailed in the TSA. 

5. Payment details

When a transitional services agreement is in place, the buyer company usually compensates the seller company for the services they provide.

As well as the actual cost of the services, the TSA should outline: 

  • Whether or not the payment for services is included in the purchase price
  • Any taxes that will apply to services rendered, and who will be responsible for them
  • Any incentives for meeting or exceeding targets or benchmarks
  • The payment structure and timeline in place

Common challenges around TSAs

TSAs are complicated agreements that can cause challenges for both the buyer and seller. Often, they’re negotiated as a last resort (and at the last minute) because the buyer wasn’t able to form a legal entity and set up the necessary structures for things like payroll in time for the sale.

This means that the buyer might resent the extra costs associated with the TSA, while the seller may feel forced into a lasting relationship with the buyer that they didn’t want. 

Here are some of the other challenges faced by both the buyer and the seller when a TSA is in place. 

Problems faced by sellers

TSAs contractually link the buyer and seller beyond the transaction’s close date. This means that the seller has to retain responsibility for employees who are no longer part of their team. Plus, providing services to the buyer often comes at a cost, which can be difficult to predict.

Problems faced by buyers

When a TSA is in place, the buyer doesn’t have 100% control over the entity that they have just purchased, often for a significant period.

They are reliant on the seller for the basic functions that are needed to do business, which can cause tension and resentment. A TSA can also cause confusion for the purchased company’s employees about who their employer actually is. 

The global payroll provider as an alternative to a TSA

One of the main reasons that TSAs are common in international acquisitions is that the buyer company is often not set up with the legal entity, bank accounts, and other formalities that they need to operate as a business and run payroll in the relevant country. 

Using a global payroll provider can be a useful alternative to relying on the seller’s existing structure through a TSA. This can serve as a temporary measure while you take the necessary steps to set up a legal entity.

It could also be a permanent solution, especially in situations where the acquired company has a low headcount and no physical headquarters. 

At CXC, for example, we can run compliant, legal payroll in many countries around the world: our geographical footprint spans 5 continents, and we provide our services from 30+ offices worldwide. Want to learn more? Speak to a member of our team today. 

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