TSA (Transition Services Agreement)

A TSA (Transition Services Agreement) is the contract under which the seller agrees to continue providing operational services to the buyer for a defined period after closing. It is used when the sold business depends on systems, people, or infrastructure that remains with the seller — accounting, payroll, technology, logistics, or shared administrative services. The TSA allows the transaction to close before operational separation is complete, with a structured plan to transfer each function to the buyer on defined timelines.

When is a TSA needed?

A TSA is needed when the acquired business cannot operate independently from day one. This occurs in three specific situations in Mexican SME M&A:

• Carve-outs: When the seller divests a business unit that shares systems, people, or infrastructure with the retained business. The separated unit needs time to replicate those functions independently. Without a TSA, the buyer receives an asset it cannot operate. See carve-out.

• Technology dependency: When the business runs on ERP, accounting, or operating systems owned by the seller’s parent or a related party. The buyer needs time to migrate to its own systems. A TSA provides continuity while migration occurs.

• Shared administrative services: When accounting, HR, payroll, legal, or IT are provided by a shared services center that stays with the seller. The buyer cannot replicate those functions overnight — the TSA bridges the gap.

In founder-owned businesses the TSA is less common but not rare. It appears when the founder provides post-closing operational functions — managing key customer relationships, overseeing a production process, or supporting a technology platform they built.

What must a TSA contain?

Six elements every TSA should define:

• Services covered: A detailed schedule of each service the seller will provide — accounting, payroll, IT support, logistics, legal, administrative. Each service described specifically. Vague descriptions create disputes.

• Duration per service: Not all services transfer at the same speed. A TSA should define a schedule per service — accounting migration may take 3 months, IT migration 6 months, payroll transfer 1 month. Each service has its own exit date.

• Price: How the seller is compensated for providing post-closing services. Options: cost-plus (seller’s cost plus a margin), fixed fee per service, or bundled monthly fee. In Mexican SME transactions, fixed fee per service is more common.

• Service standards: The level of service the seller must maintain — same as pre-closing or defined minimum standards. Without this, the seller may provide degraded service and the buyer has no contractual basis to object.

• Early termination: Either party must be able to exit a service early if the buyer completes migration ahead of schedule. Define notice period and any early termination fee.

• Liability: Caps on liability for service failures. The seller is not an insurer — the TSA should define what happens if a service fails and what damages are recoverable.

For when to negotiate the TSA in the M&A process, what to agree in the LOI, and practice in Mexico, see the TSA in M&A Mexico guide.

What is the typical TSA duration in SME transactions?

In Mexican SME M&A, TSA durations range from 3 to 18 months depending on separation complexity.

The buyer wants the shortest possible TSA — dependence on the seller post-closing creates operational risk and limits the buyer’s ability to integrate the business. The seller wants the TSA to end as soon as possible — providing services to a business you no longer own is a distraction with limited benefit.

Both incentives align toward a short, well-defined TSA with clear exit dates per service. The risk is underestimating migration complexity — a TSA that expires before the buyer is ready creates an operational crisis.

What does a real TSA case look like?

A packaging manufacturer divested its distribution division to a logistics operator. The distribution division had no independent accounting system, shared a WMS (warehouse management system) with the manufacturing operation, and its payroll was processed by the manufacturer’s HR department. The TSA covered three services:

The buyer completed accounting migration in month 4 (one month early), triggered early termination and saved MXN 45,000. WMS migration ran through month 9 as planned. Payroll transferred in month 3 as scheduled. The TSA closed cleanly with no disputes — because each service had scope, price, and exit date defined from day one.

What are the TSA risks for buyer and seller?

What do buyers and sellers ask about the TSA?

Is a TSA mandatory in an M&A transaction?

No. A TSA is only necessary when the acquired business cannot operate independently from closing. In most founder-owned SME transactions where the business has its own systems and people, a TSA is not necessary. It becomes necessary in carve-outs, businesses with shared infrastructure, or when the founder provides specific operational functions that need time to be transferred.

Who pays for TSA services?

The buyer pays. The TSA is a post-closing services agreement where the seller provides services at an agreed price. The cost is factored into the economics of the deal — a buyer that needs 12 months of accounting services at MXN 45,000/month must model that MXN 540,000 as part of total transaction cost, not as a surprise after closing.

What happens if the seller does not perform under the TSA?

The buyer may claim damages under the TSA contract. In practice, the remedy depends on how well the TSA defines service standards and liability caps. A TSA with vague standards is hard to enforce. The best mitigation is a well-drafted TSA with specific performance obligations, not litigation after a failure.

Can the TSA be extended beyond the original term?

Yes, by mutual agreement. Extensions are common when migration takes longer than planned. The TSA should include a mechanism for extension — notice period, price for the extended period (often at a higher rate to incentivize the buyer to complete migration on time), and a maximum extension term.