The second article in this series discussed the importance of the seller’s self-assessment process in preparing for a transaction as well as how to effectively collaborate with outside advisors and internal clients to maximize potential value and negotiation advantages in a transaction. There are few areas where these advantages are as immediate and crucial as in the case with transition services.

When a transaction involves the sale or purchase of a subsidiary or a division of a larger corporation (the target business), the buyer and the seller many times encounter a situation where services essential to the target business are provided not internally by the target business itself, but rather are provided as part of an enterprise-wide operation. Consequently, the sale of the target business does not include these operations, which likely are essential to the day-to-day operations of the target business. Most commonly, the buyer and the seller address this situation using a mutually agreed transition services agreement.

Scope of the Agreement

A transition services agreement is an agreement between the buyer and the seller under which the seller typically agrees to provide certain shared services to the buyer for a short or transition period following the closing of the primary transaction. An appropriately contemplated transition services agreement allows the transaction to proceed without the potential delay caused by a buyer securing those services on its own. Avoiding such a delay helps ensure a smooth transition to the buyer and its newly engaged employees and preserves the value of the enterprise just purchased. Since a well-conceived transition services agreement may be of crucial importance to the buyer, the wise seller will contemplate it in advance of the transaction negotiations.