In acquiring or selling a business, parties endeavor to ensure business continuity post-closing. Buyers often undertake all operations after closing. However, in some cases, buyers are not in a position to perform certain tasks immediately after closing, and sellers may need to perform these critical services after its divestiture. Transition services agreements may serve as key aspects of a transaction in these circumstances.
What are Transition Services Agreements?
A transition services agreement is between the buyer and seller of the business pursuant to which the seller performs enumerated services for a limited period of time post-closing. This thereby allows the transaction to proceed without delay while allowing the buyer additional time post-closing to obtain services on its own. The services addressed are often vital back-office tasks, such as accounting, human resources, payroll administration, and IT services, and the nature and extent of the services, in turn, affect the scope and breadth of the agreement.
Transition Services Agreement Components
As noted, the nature, and extent of the services affect the scope and breadth of the agreement. Nevertheless, every transition services agreement should address the (i) scope of services, (ii) fees, and (iii) term.
Scope of Services
Foundational to a transition services agreement are the services being performed. The parties should describe in sufficient detail the specific services seller is to provide, the service levels each service requires, and any remedies for nonperformance.
Fees
Sellers often charge for services performed pursuant to a transition services agreement. Fee structures vary from flat fee structures to hourly charges, per-service charge, or other payment mechanisms. In more complex transactions, parties may utilize different fee structures for different services, but regardless of the chosen fee structure, the agreement should detail fees, expenses and reimbursements, and timing of payments.
Term
Transition services agreements are temporal by nature. And due to circumstances in which they are often needed, at the time of negotiation, it is often unclear the amount of time buyer will need to procure alternate services. The agreement should specify the specific term, often ranging from a few months to a year. In addition to a term, the parties should include provisions relating to early termination of the agreement or specific services and extension or renewal terms.
Indemnification
A well-drafted transition services agreement must also include strong indemnification provisions. Buyers and sellers are often in agreement that transition services agreements should include mutual indemnification and for good reason. Buyers want to be protected against any losses it may suffer due to seller’s provision of the services, and sellers do not want to incur additional liabilities by performing the limited services for the buyer. The parties should include an indemnification provision that makes clear the types of losses covered, the scope of the indemnification coverage, and indemnification procedures.
Because transition services agreements are ancillary to the main purchase and sale agreement, their importance is often understated. However, both parties benefit from a well-drafted and negotiated transition services agreement. Buyers can avoid disruptions with their newly acquired customers, vendors, and employees. For sellers, transition services agreements reduce third-party costs to the buyer, often maximizing the seller’s transaction value.
JAH Can Help
The attorneys at JAH are available to advise you on all aspects of your merger, acquisition or sale, including ancillary agreements such as transition services agreements. Our corporate attorneys are knowledgeable and can help navigate the complexities that come with M&A deals so that you don’t have to. Click here to contact a member of our Corporate Group if you are in need of assistance.
Please note that the above JAH article does not constitute legal advice nor does it create an attorney-client relationship. Should you be in need of legal services regarding a particular matter, please reach out directly to one of our attorneys. Click here for our full website disclaimer.