Mark-up is a number the buyer can challenge.

What mark-up actually compensates.

Mark-up in a cost-plus TSA compensates the seller for three categories of cost not captured in direct cost. Administrative overhead associated with running the service for an external buyer. Risk of cost recovery shortfall if the cost allocation does not capture everything. Margin to cover the seller's time on contract administration, governance, and ongoing operations. The percentage is the seller's compensation for these three items together.

Sellers occasionally argue that mark-up is profit on a service the seller is providing at cost. The framing is incomplete. Mark-up is the negotiated compensation, and the buyer's posture should be that the compensation should match the seller's actual incremental cost of providing the service. When the cost base already includes loaded overhead allocations, the appropriate mark-up is lower. When the cost base is direct labor only, the appropriate mark-up may be higher.

The first negotiation question is what is in the cost base, before the percentage is discussed. A 5 percent mark-up on a fully loaded cost is different from a 5 percent mark-up on direct labor only. The buyer should pin down the cost definition before agreeing on the percentage. The seller's first draft often leaves the cost definition vague, which makes the percentage meaningless.

The full pricing model context is in TSA pricing models, explained. The audit discipline that makes the cost base real is in TSA pass-through pricing.

Benchmark ranges by category.

Mark-up benchmarks vary by service category. The categories that the buyer should know fall into four groups. IT services. Finance and accounting services. HR and payroll services. Procurement and operations services. Each group has a typical market range, and the seller's first draft should sit inside that range. When it sits above, the buyer has standing to negotiate down to the range.

IT services typically see mark-up between 5 and 10 percent. The cost base includes seller IT labor at standard rates, allocated infrastructure, and licensed software pass-through. Application support, infrastructure operations, and data services sit at the higher end of the range when the service is complex. Help desk and basic operations sit at the lower end.

Finance and accounting services typically see mark-up between 3 and 8 percent. The cost base is well documented and the activities are standardized. Payroll processing, accounts payable, accounts receivable, and standard close activities sit at the lower end. Treasury, tax, and specialized finance work sits at the higher end. The narrow range reflects the fact that finance activities are well benchmarked across the market.

HR and payroll mark-up typically sits between 4 and 9 percent. Procurement and supply chain mark-up sits between 5 and 10 percent. Mark-up above 12 percent for any service is outside the typical market range and should be challenged with specific benchmark data. Mark-up below 3 percent occurs in deals where the seller has agreed to absorb administrative costs as part of the broader transaction economics.

What moves the percentage within the range.

Six factors shift the appropriate mark-up percentage within the category range. Deal size matters. Larger deals carry lower mark-up because the seller's fixed administrative cost spreads across a larger base. A deal with $50M of TSA fees can support a lower mark-up than a deal with $5M of TSA fees, because the absolute administrative cost is similar in both cases.

Duration matters. Shorter TSA periods carry higher mark-up because the seller has less time to recover transition costs. A six month TSA may carry mark-up at the upper end of the range. An 18 month TSA may carry mark-up at the lower end. The duration trade should be made explicit in the negotiation, not left implicit.

Complexity matters. Services that require specialized resources or custom integration work carry higher mark-up than standardized services. Services that are well defined and standardized carry lower mark-up. The complexity premium should be supported by specific resource requirements, not asserted in the abstract.

Volume risk, scope risk, and counterparty credit risk also influence the percentage. Each of these can be addressed contractually rather than through the mark-up. A buyer who agrees to a volume cap takes on volume risk and earns a lower mark-up. A buyer who agrees to detailed scope reduces scope risk and earns a lower mark-up. The negotiation should map specific risk allocations to specific mark-up adjustments, not bundle everything into a single number.

Using benchmarks in the negotiation.

Benchmarks work in TSA negotiation when they are specific, credible, and applied to the right service. A buyer who says the market range is 0 to 8 percent on finance services and the proposed 12 percent sits outside the range gets movement. A buyer who says the proposed mark-up is high without naming a range gets no movement. The conversation shifts when the buyer brings data.

The benchmark source matters. Cross-deal experience from a buyer-side advisor carries weight. Public reference points from comparable transactions carry weight. Internal data from the buyer's own portfolio carries weight when the buyer is a private equity firm with multiple carved-out portfolio companies. Each of these sources lets the buyer cite a number rather than assert a preference.

The conversation should also separate the percentage from the cost base. A 5 percent mark-up on a tight cost base may be a better outcome than a 3 percent mark-up on a loose cost base. The buyer who only negotiates the percentage misses the structural improvement available from negotiating the cost definition. The TSA Pre-Signing Review work is where these structural negotiations land.

Where the seller resists movement on percentage, the buyer can find value elsewhere. Capping allocated overhead. Excluding specific labor categories. Limiting pass-through to invoiced third-party amounts. Each of these moves value without changing the headline mark-up. A package deal that includes structural improvements alongside a modest percentage reduction is often the highest value outcome for the buyer.

When the seller's number is too high.

When the seller's first draft proposes a mark-up significantly above the typical range, the buyer should treat the proposal as a marker rather than a position. The seller's deal team may have started high deliberately, expecting movement. The buyer's response should be specific. Cite the typical range. Cite the comparable deal context. Propose a counter at or below the midpoint of the range. Move toward agreement from there.

Where the seller defends the high mark-up with reasoning, the buyer should test the reasoning. If the seller cites complexity, ask for the specific resources required. If the seller cites duration risk, propose a longer TSA in exchange for a lower mark-up. If the seller cites volume risk, propose a volume cap that absorbs that risk. Each of these moves converts a categorical defense into a specific trade.

Mark-up that remains above market after negotiation is a signal to look elsewhere in the deal economics. The TSA pricing should not be evaluated in isolation. A high mark-up TSA may be acceptable if other elements of the SPA, indemnity, or working capital adjustments shift in the buyer's favor. The TSA negotiator should coordinate with the SPA team to ensure the overall deal economics work.

The fee patterns to watch for during the TSA period itself, including extension fees and renegotiation triggers, are covered in TSA extension fees, explained. The post-signing audit work that protects the buyer from mark-up drift is part of the discipline that converts a signed TSA into a successful exit.

More on TSA negotiation.