This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
A common carve-out pattern looks like this: a buyer agrees to acquire one division of a larger company. The division has real customers, real revenue, its own P&L — and no payroll department, no ERP license, no email domain, no IT staff, because all of that lives at the parent. Everyone at the signing dinner knows the business cannot run a single day without services from the seller. And yet the transition services agreement governing those services is, as of the signing dinner, a two-page term sheet marked “form to follow.” The purchase agreement went through nineteen drafts. The document that determines whether the business functions on the morning after closing will be papered by associates during the interim period, starting from whichever template somebody finds first.
That allocation of attention is backwards, and the deals that get burned by it get burned in predictable places.
The TSA turns your counterparty into your vendor
Structurally, a TSA is simple: for a defined period after closing, the seller keeps providing named services — payroll processing, benefits administration, IT infrastructure, accounting, regulatory support — and the buyer pays for them. But notice what the relationship does. The seller, who just maximized its price by negotiating against the buyer, becomes the buyer’s most important vendor, providing services it has no long-term interest in providing well, at prices it wanted to stop incurring, through employees who may be leaving. Meanwhile the buyer’s alternative to performance isn’t switching vendors — there is no other vendor for the seller’s own ERP instance. The TSA is the only document standing between the buyer and an inoperable business, which is why it deserves the same negotiating seniority as the reps and the working capital mechanics, not a seat at the kids’ table.
Scope is an operational map, not a sentence
The classic TSA failure is a scope schedule written from memory. The right process is closer to an audit: walk every function the carved-out business consumes — payroll runs, benefits enrollment, AP and AR processing, tax compliance, IT helpdesk, security monitoring, warehouse management software, even badge access and phone systems — and ask, for each one, who provides this today, and who provides it on day one. The public mega-deals show what thoroughness looks like; the WK Kellogg transition services agreement filed with the SEC in the Kellanova cereal spin-off runs to detailed service schedules per function, with service-by-service terms and charges — and that was a separation planned for a year by teams who knew the business intimately.
Because no schedule is ever complete, the omitted-services clause does quiet, essential work: any service the seller provided to the business in the twelve months before closing that was inadvertently left off the schedule gets added on request, at a consistent price. Without it, every discovery in month two — and there are always discoveries in month two — becomes a fresh negotiation with a counterparty who has no reason to be generous.
The service standard should point backwards
Sellers will not warrant service quality like a commercial provider, and buyers should not expect them to. The market compromise points history at the problem: services are provided in substantially the same manner, and with substantially the same degree of care, as they were provided to the business during the year before closing. The buyer isn’t entitled to better than it ever got; the seller isn’t allowed to deliver worse. Around that standard sits a liability architecture that founders on both sides should actually read — consequential damages excluded, aggregate liability commonly capped at some multiple of fees paid or payable under the TSA, carve-outs for gross negligence and willful misconduct. The practical meaning: the TSA remedy for bad service is a service credit and an escalation meeting, not a damages case. Buyers who understand that up front invest in the escalation mechanics — named service managers, response times, a path to executives — because governance, not litigation, is the real enforcement tool for a twelve-month contract.
Price it at cost, term it per-service, and make the exits clean
Three economic terms do most of the work. First, pricing: the standard is cost or cost-plus a modest markup, per service, with pass-through of third-party charges. A seller pricing the TSA as a profit center invites the buyer to leave early; a buyer demanding below-cost service is asking the seller to subsidize its own exit — neither is stable. Second, term: each service gets its own duration matched to a realistic migration plan, commonly six to eighteen months, with extension rights at escalating rates. The escalation is a feature, not a gouge — it prices the seller’s growing burden and pushes the buyer to actually finish the migration instead of renting the seller’s back office indefinitely. Third, exit: the buyer should be able to terminate any service early for convenience on notice, dropping the fee, with any stranded third-party costs allocated explicitly. The endgame is a buyer standing on its own systems with the TSA quietly expiring service by service — the same discipline that governs the rest of a two-track separation, which I walked through in the carve-out and two-track close post.
Third-party consents are the trap under the floorboards
Here is the issue that surfaces latest and costs the most. The seller’s software licenses, data subscriptions, and outsourcing contracts were licensed to the seller, for the seller’s business. When the seller uses those same systems to provide TSA services to a business it no longer owns, that use frequently falls outside the license grant — and enterprise software vendors read spin-off announcements specifically looking for this. The fix is diligence timing: identify the licenses implicated by each scheduled service before signing, price the consents and second-instance fees into the deal, and allocate who bears them in the TSA itself. It is the same category of problem as the anti-assignment issues that decide deal structure — the subject of the Meso Scale post — surfacing one document later than everyone expected.
In most cases, the TSA that works is the one nobody remembers negotiating hard, because the migration finished on schedule and the fights never ripened. That outcome is bought at signing, in the scope schedules and the exit mechanics, by treating the document as what it is: the operating system of the deal’s first year.
If you are negotiating a carve-out or staring down a transition services schedule, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
