Transition Services Agreement Spin-Off: Understanding the Basics
When a company decides to spin off a division or subsidiary, it can be an exciting and challenging time for everyone involved. However, the process of separating from the parent company can be complex and requires careful planning to ensure that the new entity can operate as a standalone business. One critical consideration is the transition services agreement (TSA).
What is a TSA?
A TSA is a contract between the parent company and the newly spun-off entity, which outlines the services and support that the parent company will provide to the new entity during the transition period. The TSA may include items such as IT support, human resources, accounting and finance, legal, and other operational services.
Why is a TSA Important?
A TSA is critical because it enables the new entity to maintain business continuity during the transition period, which can take several months or even up to a year. The agreement ensures that critical business functions continue uninterrupted, allowing the new entity to focus on establishing its operations and building its customer base.
Types of TSA
There are two types of TSA: pre-closing TSA and post-closing TSA. A pre-closing TSA is executed before the spinoff is completed and outlines the services that the parent company will provide to the new entity immediately after the transaction is complete. A post-closing TSA, on the other hand, is executed after the spinoff is completed and outlines the services that the parent company will provide to the new entity during a specified period.
Key Considerations
When negotiating a TSA, it is crucial to consider the following:
1. Scope of Services: The agreement should clearly define the scope of services that the parent company will provide to the new entity. This includes the duration of the services, the level of support, and any other relevant details.
2. Fees: The agreement should specify the fees that the new entity will pay to the parent company for the services provided. The fees should be reasonable and reflect the fair market value of the services.
3. Service Levels: The agreement should outline the service levels that the parent company will maintain during the transition period. This includes response times, availability, and other performance metrics.
Conclusion
In conclusion, a TSA is critical when a company decides to spin off a division or subsidiary. It ensures that critical business functions continue uninterrupted during the transition period, enabling the new entity to establish its operations and build its customer base. When negotiating a TSA, it is crucial to consider the scope of services, fees, and service levels to ensure that the agreement works for all parties involved.