Many triggers can prompt companies to change their operating models, such as acquisitions, divestitures, legislative or regulatory actions and operational changes. These triggers may lead to transitions that often result in complex and lengthy transformation programs. During this period of change, companies require a framework to facilitate the continuity of essential services. Such services may encompass back-office functions, including tax, accounting and legal support, as well as operational areas, such as procurement, logistics and manufacturing. This arrangement typically takes the form of a transition services agreement (TSA). A TSA is a contract between two parties that outlines the terms under which the seller will provide specific essential services to the buyer for a defined period following the completion of the transaction.

TSAs are commonly used between unrelated buyers and sellers in acquisitions and divestitures to manage operational disruption and financial risk by clearly defining, among other issues, the scope of services involved, associated remuneration, the term of the arrangement, the costs and risks borne by each party and communication and escalation protocols. Although less commonly seen, they can also be used for many of the same reasons between related parties during internal restructurings and operating model changes. The agreement explains the intent of the parties and can help support the appropriateness of journal entries, service fees and profit allocation between entities. An EY article elaborates on the tax and related business issues to consider when contemplating this type of agreement.