Day One Readiness
Bound the reverse TSA. Protect Newco focus.
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A reverse TSA is the carve-out provision under which Newco provides services back to the seller after close. The service catalog is shorter than the forward TSA, but the operating risk is often higher because Newco is the supplier, not the buyer. This article sits inside the broader carve-out advisory programme and explains when reverse TSAs arise, how to price them, and how to bound the exposure.
A reverse TSA arises when the divested business holds capability that the seller still needs after close. The pattern is most common where the carved-out business operated a specific product line, manufacturing capability, technology platform, or customer service function that the parent continues to rely on. The seller has retained the obligation. The capability is now inside Newco. The reverse TSA bridges the gap until the seller can stand up the capability on its own or sourced from elsewhere.
Common reverse TSA categories include manufacturing capacity for a product the seller still sells under its retained business, customer service for a brand the seller retained, technology platforms developed inside the divested unit that the seller wants to keep using, regulatory licences held in entities transferring to Newco, and physical infrastructure such as warehousing or distribution sites that the seller wants to use during its own transition.
Reverse TSAs are often less rigorously documented than forward TSAs. The seller drafts the forward TSA in detail because it is the supplier. The reverse TSA may appear as a short schedule with limited specification. Programs that accept the lighter treatment usually find ambiguity in the first 90 days. The reverse TSA needs the same rigor as the forward TSA, even when the dollar value is smaller. The pre-signing context is in TSA pre-signing leverage.
The strategic question is whether the reverse TSA is desirable. Newco may want it because the revenue subsidises the standalone cost base. Newco may want to avoid it because the operating distraction outweighs the revenue. The PE sponsor should decide deliberately, not by default.
Reverse TSAs default to cost-plus pricing in most drafts. The seller frames the work as continuation of the parent operating model and proposes cost recovery plus a small mark-up. The buyer should pressure-test this position. A reverse TSA is a commercial supply arrangement. Newco bears the cost, the operating risk, the management overhead, and the opportunity cost of capacity that could serve other customers. The pricing should reflect supplier economics, not allocation economics.
Fixed-fee pricing is often the better structure for the supplier side. The buyer pays a known number each month, the supplier carries the cost variability, and the relationship is bounded. Cost-plus pricing transfers cost overruns to the seller but introduces friction. Pass-through pricing for variable cost items is the usual compromise. The cost-plus context is in TSA cost-plus vs fixed-fee.
The mark-up needs to cover more than direct cost. Management overhead, working capital, regulatory compliance, dispute risk, and opportunity cost all need to be priced. A mid-market reverse TSA mark-up of 10 to 25 percent is common. Markups below that level usually understate the supplier overhead. Programs that anchor on cost-plus 5 percent because the seller proposed it leave money on the table.
Extension fees apply on reverse TSAs too. The default duration of the reverse TSA needs an end date. If the seller wants to extend, the extension fee schedule should escalate to reflect Newco's growing inconvenience. Programs that accept open ended reverse TSAs find their operating capacity locked up serving a counterparty whose volume may be declining.
A service-level commitment in a reverse TSA cuts the other way from a forward TSA. Newco is the one on the hook for delivery. The seller draft typically pulls hard on service-level rigor, since the seller is now the buyer and wants delivery certainty. The negotiated position should accept service-level commitments that match Newco's actual operating capability, with service credits at levels Newco can afford if missed.
Programs that accept aggressive service-level commitments without internal validation usually face service credits in the first quarter. The credits flow back to the seller as price reduction. The cumulative drag on reverse TSA profitability can erase the strategic value of having the arrangement at all. The discipline is to negotiate service-levels based on documented operating performance, not aspirational targets.
Newco also needs to negotiate liability caps. The seller may propose unlimited liability for service failures, citing the criticality of the service to the seller's operations. The buyer should resist. Liability needs to be capped at a multiple of annual reverse TSA fees, with exclusions for consequential damages that exceed the cap. Programs that accept unlimited liability create exposure that the reverse TSA pricing does not compensate.
Termination rights matter both ways. Newco needs the right to terminate the reverse TSA if it becomes operationally unsustainable. The seller will want termination protection. The negotiated position usually allows the seller to terminate for convenience with a notice period, while Newco can terminate for cause or for material change in volumes. The service-level context is in TSA service-level clauses.
A reverse TSA needs a dedicated supplier relationship manager on the Newco side. The role coordinates demand forecasting, capacity planning, invoicing, service-level reporting, and dispute response. Programs that handle the reverse TSA through generic operations staff usually find that the seller's requests crowd out other priorities. A named owner allows the rest of the organisation to focus on the value creation plan.
The forecasting discipline is critical. Newco needs visibility into the seller's volume forecasts so capacity can be planned. Sellers often resist sharing forecasts because they reveal sensitive business information. The reverse TSA should require a rolling forecast, refreshed monthly, with confidentiality protections. Programs that operate without forecasts end up either over or under capacity, both of which damage reverse TSA profitability.
Change control matters more on the reverse TSA. The seller may request changes in service scope, volume, geographic coverage, or quality requirements. Each change needs a formal change request, a Newco evaluation, a pricing impact, and a sign off. Programs that accept informal change requests find their cost base creeping while reverse TSA fees stay flat.
The exit ramp on a reverse TSA should be defined from the start. Newco wants to end the arrangement as soon as the strategic value declines. The seller wants flexibility on extension. The negotiated position usually includes a default end date, an extension fee schedule, and a final mandatory termination point beyond which Newco has no obligation. Programs that accept indefinite reverse TSAs become entangled with sellers in ways that complicate exit.
Reverse TSAs go wrong in predictable ways. The most common failure is volume decline. The seller's retained business shrinks faster than expected. Newco's cost base, sized for the forecast volume, becomes uneconomic. The reverse TSA pricing was set based on a higher volume assumption. The unit economics deteriorate. Programs that include volume floors or minimum payment commitments protect against this scenario. Programs that price per unit without a floor end up subsidising the seller's decline.
The second failure is operational distraction. The reverse TSA consumes management time disproportionate to its revenue. Senior operators spend hours on seller demand reviews, service-level investigations, and dispute resolution. The opportunity cost shows up in slowed progress on the value creation plan. Programs that delegate reverse TSA management deep into the operational team usually preserve senior focus on growth priorities.
The third failure is exit drag. At Newco's own exit, an active reverse TSA is a complication. Acquirers either need to accept the obligation or negotiate its termination. The pricing of the reverse TSA may need to be revisited. Some acquirers will discount valuation for the complication. Programs that complete reverse TSA exit before their own sale process have cleaner exits. The Day One context is in carve-out Day One readiness.
The fourth failure is strategic capture. A long running reverse TSA can shape Newco's operating decisions in ways that constrain its independence. Capacity decisions, system investments, and even hiring choices may be influenced by the reverse TSA obligation. Programs that limit reverse TSA duration and scope preserve strategic flexibility for the value creation period.
The Day One programme that any reverse TSA depends on.
Read the article →Where reverse TSAs sit in the operating partner workstream.
Read the article →How reverse TSA pricing can offset Newco standalone cost increase.
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Fixed-fee proposal in 48 hours. Senior team on day one. The first conversation is always free.
Seven buyer-side moves to exit a Transition Services Agreement on time and below budget. The mark-up, the extension-fee curve, exit sequencing, and the 11-month calendar.
In a reverse TSA the buyer provides services back to the seller — the unusual seat where you are now the provider, with your own pricing, scope, exit and liability traps. On a representative four-service reverse arrangement, pricing at cost rather than cost-plus-risk leaves roughly $0.6M of real burden unrecovered over a nine-month term.
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