M&A Vocabulary – Experts explain: Transition Service Agreement

However, in a largely interconnected world, in which the standardised management of companies by means of a group-wide  data management system is of decisive importance, it is becoming increasingly difficult to carry out such a comprehensive transfer of data at the right time, especially if the target company is a subsidiary of an internationally operating Corporate Group. 

In such a case, it is usually necessary to conclude a ‘Transition Service Agreement’ (TSA), which regulates the conditions for the provision of services by the seller for a certain period after the closing. 

During the due diligence process, a detailed recording of the processes required in the target company, the hardware and software used, and the data storage is essential. With regard to the applicable legal framework in terms of data protection, the buyer must examine the extent to which the seller can still have access to data, which services must be provided until the data has been fully migrated, the time required to complete a technically and legally secure transfer of the data and the level of quality of these services. Particularly with regard to the level of quality, it is advisable to conclude ‘Service Level Agreements’ (SLA), which, in addition to determining the quality and scope of unhindered access to the data as part of the service provision, also contain agreements on response times in the event of disruptions, necessary maintenance work and sanctions in the event that services are not provided as agreed.

In principle, these are services that can be invoiced to the buyer by the seller at standard market conditions. In view of the high importance that the TSA usually has for the buyer, termination options before the end of the agreed period should only be agreed for the service provider in exceptional cases. Rather, it is recommended to include provisions for the event that, in an unforeseeable manner, the time agreed by the parties for the provision of the service is not sufficient to complete the full transfer of the data.

For the sake of completeness, it should be noted that, in addition to the case of data processing described above, other services may also be the subject of such a TSA, e.g. the onward supply of certain components.

Constellations are also 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 the seller is still dependent on the corresponding services or other support from the buyer for a certain period of time.