Price a transition services agreement with a finance cost model

A transition services agreement, often called a TSA, can keep a divested business operating while the buyer establishes replacement capabilities. Finance needs a model of the specific services, capacity, duration, and exit work. An allocation from the seller's old management accounts is a starting record, not automatically the appropriate price or the buyer's future standalone cost.

BDO's carve-out guidance distinguishes temporary shared services, standalone costs, and costs that remain with the seller. PwC's TSA discussion describes the difficulty of exiting arrangements when systems and decisions are interdependent. Use those distinctions to build an explicit service and cost schedule. The agreement's commercial terms should reflect the actual transaction and receive appropriate legal and tax review.

List each service with its recipient entity, operating owner, volumes, coverage hours, required output, access, and dependencies. Payroll processing, invoice preparation, ledger access, and technical accounting support are different activities. Specify what the seller will do and what the buyer must supply or approve. Missing responsibilities can create work that neither side included in the price.

For the charging method, distinguish a fixed fee, documented cost reimbursement, volume-based charge, or another negotiated basis. Identify any markup, minimum commitment, currency, taxes, and pass-through cost rules. Confirm how a change in volume or scope changes the charge. A short agreement with vague inclusions can leave a much less predictable bill than a detailed service schedule.

Build a monthly schedule for recurring support and a separate schedule for one-time setup, data extraction, system separation, training, and exit testing. Identify who bears each amount. Include third-party licensing or contract changes that need consent or a new purchase. Where a supplier quote is not yet available, label the estimate and assign someone to resolve it.

Avoid charging or budgeting the same resource twice. If a specialist's time is included in the monthly service fee, identify whether additional exit work is genuinely outside that capacity. On the buyer's side, model periods when replacement staff and TSA charges overlap. The recurring fee can fall only when the relevant service actually ends under the agreed terms.

Assume a hypothetical arrangement costs $25,000 a month for six months, plus $40,000 of exit work. That totals $190,000 before other costs. Suppose a four-month exit is operationally feasible but requires $60,000 of setup and exit work. Its comparable total is $160,000, suggesting a $30,000 difference under those assumptions.

Check whether the earlier scenario includes replacement operating costs, parallel running, supplier commitments, and any minimum service period. If those differ, include them before drawing a conclusion. The numerical example is not a typical TSA price or a promise that accelerating exit saves money. It illustrates why the recurring fee and the cost of achieving readiness must be compared together.

Create an exit plan for each service rather than relying on one date for the entire agreement. Payroll may become independent before the ledger archive or tax reporting process. Define the required data, permissions, reconciliations, operating procedures, and observed task completion. The buyer should be able to perform the service and recover from ordinary exceptions before temporary support ends.

Track dependencies that could delay that readiness: a banking approval, software license, customer migration, employee transfer, or unavailable historical report. Record the earliest decision date for avoiding an extension. Keep a delay scenario in the cash forecast, and obtain any required extension through the contractual process rather than assuming the seller will continue informally.

Ending a TSA fee does not necessarily remove the seller's associated spending. Staff, premises, or supplier commitments may remain until a separate action is completed. BDO identifies these retained shared costs as a stranded-cost issue. Keep the seller's reduction plan distinct from the buyer's service exit and from any historical allocation used in the carved-out financial statements.

Maintain a monthly reconciliation of services delivered, charges, scope changes, buyer readiness, and seller costs still to be addressed. Resolve billing questions against the agreed service schedule and supporting evidence. At final exit, retain the acceptance record, last charge, remaining obligations, and transferred documents so both finance teams can close the arrangement with a traceable record.