Doing a Deal from the Inside Out- Selected Negotiating Points for Transition Services Agreements

The previous article in this series discussed many of the key “pre-deal” items a seller should consider with respect to potential transition services a buyer may continue to need from the seller following the purchase of a subsidiary or business unit. The seller’s knowledge of the potential inventory of transition services is an important element that should be used during negotiations with the buyer. Likewise, the buyer’s diligence should cover as much as possible with respect to potential services. With such preparation as background, the parties will be in the best position to successfully navigate the issues that will arise in negotiations.

Transition services agreements traditionally have been underappreciated agreements between the parties in a purchase and sale transaction. However, they fill an important need assisting the buyer in preserving the value of the businessjust purchased and assisting the seller in making a particular target attractive. While simple in construct, the items addressed by a transition services agreement must be taken extremely seriously as they provide a buyer with important value protection and could expose the seller to potential liability following the closing. As with many other documents in a large-scale transaction, the keys for both parties lie in preparation for negotiation and appreciation for the risks assumed. Discussed below are some common issues associated with transition services agreements.

Services to Be Provided

Typically, the body of a transition services agreement will reference exhibits setting forth the specific details description of service, terms of provision and fee. The technical precision of such descriptions necessitates exhibits to avoid burdening the body of the transition services agreement. Often, depending in part on when the form of the transition services agreement is agreed upon (prior to signing or between signing and closing), there may be a “catch all” provision that is designed to supply the buyer with other services that were historically provided but for some reason not identified. The seller’s willingness to agree to such a provision will be a function of self-assessment and resources following the closing.