TSA in M&A Mexico: a guide for buyers and sellers

A TSA (transition services agreement) lets the deal close when the acquired business still depends on systems, people, or infrastructure that remain with the seller. This guide covers when to negotiate it in the M&A process, what it should include (scope, price, exit), which services are typically covered, the difference between carve-out and standalone SME, risks for buyer and seller, and common practice in Mexico. Bottom line: agree scope, price, and exit terms in the LOI; document everything in the TSA before closing.

What should the TSA define?

Scope (which services, for how long each), price (fixed monthly or cost-plus), service standards where relevant, extension mechanism, and liability caps. Without this, buyer and seller are exposed to disputes after closing.

Typical services under a TSA

The most common in Mexican SMEs: accounting and financial reporting, payroll and benefits, technology (email, ERP, support), shared logistics or warehouse, and administrative services (legal, HR, procurement). Typical duration varies: payroll 3–6 months, accounting 6–12 months, IT depending on migration complexity.

• Accounting and close. Month-end close, reporting to the buyer, tax compliance. Often one of the longest (6–12 months).
• Payroll. Payroll processing, social security, tax. Usually transferred in 3–6 months.
• IT and systems. ERP access, email, support. Depends on whether the buyer replicates or migrates to its own infrastructure.
• Logistics. Shared warehouse, shipments, inventory. Common in industrial carve-outs.

Carve-out vs standalone SME

In a carve-out, the sold business is part of a larger unit: it shares back office, systems, and sometimes people. The TSA is almost mandatory for operations to continue until the buyer replicates or migrates. In a standalone SME with its own systems and team, a TSA only applies when the founder or parent provides specific functions that cannot be transferred at closing (e.g. owner’s accounting, a shared ERP). Most founder-owned SME sales do not require a TSA.

Risks and mitigation

The buyer depends on the seller to operate; if the seller underperforms, there is disruption. The seller bears the cost of continuing to operate and the risk of non-payment or dispute by the buyer. Mitigation: a well-drafted TSA with clear scope, service standards, defined prices, and liability caps; and agreeing terms in the LOI so they are not renegotiated under pressure after closing.

Checklist before signing

Buyer and seller should have closed before closing:

• List of services and duration per service.
• Price per service or in aggregate (monthly or total for the term).
• Service standards where relevant (delivery timelines, support levels).
• Extension mechanism (notice, price, maximum term).
• Liability cap and damage exclusions.
• Confidentiality and use of data during and after the TSA.

Practice in Mexico

In Mexican SME transactions the TSA is often drafted in Spanish when the parties are Mexican; in cross-border deals it may be bilingual or in English with Mexican law. TSA contracts are enforceable in Mexico under the Civil Code and contract law; the key is that the document clearly defines obligations and remedies. The party that usually proposes the first draft is the buyer or its counsel; the seller negotiates scope, price, and liability cap.

FAQ

Is the TSA signed with the LOI or with the definitive agreement?

Scope, indicative price, and term are agreed in the LOI or a side letter before closing. The TSA contract is typically signed together with the definitive purchase agreement or at closing. Signing only the LOI without defining TSA terms leaves the buyer exposed to undefined costs and timelines after closing.

What happens if the transition period is not met?

The TSA should provide for extensions by mutual agreement — notice period, price for the extended period (often higher to incentivize the buyer to migrate on time), and maximum term. If the seller fails to provide critical services, the buyer can claim damages; if the buyer does not pay, the seller can suspend services under the contract. That is why service standards and liability caps must be clear in the TSA.

Can the buyer terminate the TSA before the agreed term?

Yes, if the TSA allows it. Many TSAs include early termination with notice (e.g. 30–60 days) once the buyer has migrated the function. The buyer pays through the effective termination date. Terminating early without that clause may require mutual agreement or payment for the remainder of the term.

Who typically drafts the TSA in an SME transaction in Mexico?

In practice the buyer or its legal advisor usually proposes the first draft, because the buyer needs to ensure receipt of the services. The seller negotiates scope, price, SLAs, and liability caps. In carve-outs or transactions with many TSA functions, both sides often involve M&A-experienced counsel.