TSA Pre-Signing Review
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TSA cost modeling in diligence is the discipline of turning a draft TSA into a multi year cost trajectory the deal team can defend. A working model captures the base case, the realistic extension case, and the stranded cost overlay. It feeds the value creation plan, the post close budget, and the investment committee memo. The work sits inside the broader TSA due diligence practice and is one of the highest leverage deliverables the buyer side advisor produces during pre signing.
The Quality of Earnings model tracks the seller's historical cost of providing services. It usually does not project the full forward cost trajectory once the buyer takes ownership. Extension fees do not appear in QoE. Stranded costs do not appear in QoE. Exit related transition costs do not appear in QoE. The deal team that relies solely on QoE underestimates the post close cost burden.
A dedicated TSA cost model captures the full trajectory. The base case projects expected TSA cost across the planned duration. The extension case overlays realistic extension fee exposure given the buyer's actual exit timeline risk. The stranded cost overlay captures costs that persist after exit because the buyer cannot eliminate them on day one of post TSA operations.
The model is built bottom up from the catalog. Each catalog line gets a monthly cost trajectory tied to the contract pricing schedule, the volume assumptions, and the realistic exit milestone. The aggregate model rolls these into a cash flow view that ties back to the investment committee memo and the funding plan.
The buyer side advisor builds the model during the pre signing review window. The deliverable is the model itself, a written summary of the assumptions, a sensitivity table showing the impact of extension scenarios, and a recommended budget the buyer should reserve for TSA cost. The work pairs with the TSA diligence checklist.
The base case projects what the buyer pays the seller if the TSA runs as planned. Each catalog line gets a monthly cost based on the contract pricing schedule. The model carries the cost forward for the planned duration and then drops to zero at the planned exit milestone for that line.
The base case needs explicit assumptions on volume. Where the contract pricing flexes with volume (tickets, transactions, users), the model needs a volume assumption tied to expected operating reality. The buyer side advisor builds three volume scenarios where the contract is volume sensitive: high, base, low. The aggregate cost trajectory varies across these scenarios.
Pass-through costs need separate treatment in the base case. Pass-through is the seller's actual third-party cost billed to the buyer. The base case captures pass-through at expected actual levels with a sensitivity range based on contract scope. Pass-through often surprises buyers because the seller has no incentive to limit it.
One time costs also belong in the base case. Day One stand-up fees, knowledge transfer fees, exit transition fees, audit fees. The model carries them at expected levels with line items so investment committee can see where they hit the cash flow. The work pairs with TSA pricing models.
The extension case overlays realistic exit slippage onto the base case. Most TSAs slip. The base case is the planned trajectory. The extension case is the trajectory that actually plays out in 60 to 70 percent of carve-outs the firm sees. The deal team that funds only to base case ends up surprised when the extension bill arrives.
The extension case applies the extension fee curve from the contract to the slipped portion of each catalog line. Where the contract escalates from 100 percent to 110 percent in months one through three of extension, to 125 percent in months four through six, to 150 percent thereafter, the model captures the actual cost of three or six or twelve months of extension on each line.
The model needs realistic slip assumptions. Carve-outs with strong Day One readiness and disciplined exit governance slip an average of 2 to 4 months. Carve-outs with weak readiness or governance slip 6 to 12 months. The extension case should use the appropriate slip range for the specific deal based on what diligence revealed about the buyer's readiness and the seller's cooperation profile.
The extension case typically adds 15 to 30 percent to the base case TSA cost. The variance gives investment committee a meaningful range. The deal team should fund to the extension case rather than the base case to avoid post close funding requests. The work pairs with TSA exit vs extension cost analysis.
Stranded costs are run rate costs the buyer continues to bear after the TSA ends. Software licenses signed at the seller's volume that cannot be downsized immediately. Allocated headcount the buyer hires before peak TSA exit. Data center share that the buyer keeps paying for during cutover. Overhead allocations the buyer cannot eliminate until restructuring completes.
The stranded cost overlay captures these as a separate cost layer in the model. The layer typically peaks at TSA exit and decays over 12 to 24 months as the buyer rightsizes the cost base to the carved-out operation. Without the overlay, the model shows TSA cost dropping to zero at exit, which is rarely the operational reality.
The overlay needs to identify the specific stranded categories the deal will produce. Common categories include enterprise software licenses, data center capacity, real estate, allocated overhead, and shared service charges that continue past the TSA exit. The buyer side advisor maps each category, estimates the duration and quantum, and adds the layer to the model.
Stranded costs typically add 5 to 15 percent of the buyer's first year run rate to the cost base. They are the most under modeled element of carve-out economics. The deal team that ignores them ends up with a value creation plan that misses by stranded cost. The work pairs with stranded costs in carve-outs.
A single point estimate of TSA cost rarely survives investment committee review. The model needs sensitivity tables that show how TSA cost varies with the assumptions that matter most. Exit timing. Extension fee curve negotiation outcome. Volume scenarios. Pass-through pricing scenarios. Stranded cost duration.
The sensitivity table should isolate one variable at a time so the deal team can see which assumptions move the answer most. In most deals, exit timing is the most sensitive lever. Extension fee curve calibration is second. Stranded cost duration is third. Pass-through and volume tend to be lower sensitivity unless the deal has unusual structure.
Scenario design should be deliberate, not arbitrary. The pessimistic case should reflect what happens with weak exit governance and aggressive seller negotiating posture. The optimistic case should reflect strong governance, disciplined exit execution, and successful pre signing fee curve negotiation. The deal team uses the range to size the funding reserve.
The model output should feed into the investment committee memo as a TSA cost slide with the base, extension, and stranded layers stacked. The slide should also show the implied EBITDA drag during the TSA period and the year of run rate after exit. The work pairs with TSA cost benchmarks.
The TSA cost model is not a standalone deliverable. It feeds the value creation plan. The PE thesis projects EBITDA expansion over the hold period. TSA cost is the early drag against that expansion. If the value creation plan does not include the TSA cost trajectory, the year one and year two EBITDA numbers will miss.
The buyer side advisor produces a value creation overlay alongside the TSA cost model. The overlay maps TSA cost reduction milestones to specific value creation actions: exit milestones that retire cost lines, renegotiation tactics that reduce mid TSA cost, stranded cost elimination plans that reduce the post exit cost layer. Each milestone has a quantified impact and a defined owner.
The operating partner uses the overlay to set portfolio company expectations. The Newco CEO and CFO receive a TSA cost trajectory at Day One that they are accountable for executing against. The portfolio operations team uses it to track variance to plan during the TSA period. The board reporting framework reflects the trajectory.
The model gets refreshed at quarterly intervals during the TSA period. Each refresh compares actual TSA cost to model forecast, identifies variance drivers, and updates remaining trajectory based on what has been learned. The discipline keeps the TSA cost trajectory visible at the operating partner level. The work pairs with operating partner value creation TSA.
The buyer side advisor builds the TSA cost model during the pre signing review window. The model is an Excel artifact with documented assumptions, sensitivity tables, and a clear audit trail. The deal team uses it during investment committee review and hands it to the operating partner and Newco CFO at Day One.
The work is delivered under a Fixed Fee or Portfolio Retainer engagement. The Fixed Fee covers a single deal. The Portfolio Retainer covers PE platforms running multiple TSAs across the portfolio with a consistent modeling methodology applied to each. The buyer side advisor scopes the work during deal intake and delivers a fixed-fee proposal within 48 hours of intake.
A working TSA cost model changes the post close trajectory. The deal team funds correctly. The operating partner tracks the right metrics. The Newco CFO executes against a defined plan. The investment committee has a defensible TSA cost view in the deal memo rather than a placeholder. The work pairs with diligence timeline and team.
The model is the deliverable but the discipline is the value. The buyer side advisor brings the methodology built from carve-out experience across industries. The deal team brings the deal specific context. Together they produce a TSA cost view the firm and the investment committee can defend.
The buyer-side checklist for catalog, pricing, governance, and exit before the term sheet hardens.
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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.
On a representative $48M-revenue carve-out, the CIM models the TSA at $4.2M. Read in diligence — separation scope tested, draft TSA red flags caught, stranded cost sized — the true cost lands at $6.8M. That $2.6M gap is set before signing, and it is only visible to the buyer who reads the separation in diligence rather than discovering it in delivery.
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