TSA Renegotiation
Paying mark-up on an inflated base? Renegotiate the terms.
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Comparing TSA mark-up by industry is useful, but it misleads if it stops at the percentage. A defensible cost-plus mark-up usually sits in the 5 to 10 percent range, and that band holds across most sectors. What changes by industry is the cost base the mark-up sits on, and that is where the real overcharge hides. Reading both together is the foundation of disciplined TSA cost reduction.
In a cost-plus TSA, the mark-up is the percentage the seller adds on top of its cost to provide a service. Its legitimate purpose is to cover the management attention and overhead of supporting a business the seller no longer owns. A figure in the 5 to 10 percent range is generally defensible on that basis.
A TSA is not meant to be a profit center. The principle in most transactions is that the seller provides transitional services at or near cost, with a modest contribution, while both sides work toward exit. A mark-up well into double digits is a signal that the seller is treating the arrangement as a margin opportunity rather than a transition obligation.
The figures here are indicative ranges, not contractual standards. The useful insight is the principle behind them: the mark-up should be a contribution to overhead, and a buyer who knows the fair band can recognize when the headline percentage has drifted past it.
Buyers often expect mark-up to vary widely by industry, and it does not. The headline percentage tends to cluster in a similar band whether the deal is in industrials, technology, healthcare, or consumer goods. The cost-plus convention travels across sectors more consistently than the rest of the deal.
What varies dramatically is the cost base. A capital intensive manufacturer carries heavy infrastructure and plant cost. A regulated healthcare or financial business carries compliance and control cost. A services business carries fully loaded labor cost. The same 8 percent mark-up produces wildly different absolute charges depending on which base it multiplies.
This is why a mark-up benchmark by industry is only half the picture. The percentage tells the buyer whether the seller is being greedy at the surface. The cost base tells the buyer how much money is actually in play. A sector lens matters because it shapes the base, not because it changes the mark-up.
A sophisticated seller keeps the headline mark-up modest and builds the real margin into the cost base. A visible high percentage invites a fight. An inflated base is quieter, because it sits inside allocated overhead, fully loaded labor rates, and bundled charges that the buyer struggles to unpick.
The common techniques are familiar across sectors. Allocating corporate overhead the carved out business will never use, charging fully loaded rates that include parent benefits and facilities, and bundling services so individual costs cannot be tested all push the base up. The mark-up then looks reasonable on a number that is already too high.
This is the trap a mark-up benchmark alone walks the buyer into. A seller offering a fair sounding 7 percent on a base padded by 30 percent has achieved a larger overcharge than a seller asking a blunt 15 percent on an honest base. The buyer who only argues the percentage wins the visible fight and loses the real one.
In capital intensive industries, the base inflates through infrastructure and shared asset cost. Data centers, plant systems, and networks carry large allocated charges, and the seller can load decommissioning and maintenance the carved out business does not consume. Infrastructure lines deserve the hardest scrutiny here.
In regulated industries, compliance and control cost is the soft spot. Sellers can allocate risk, audit, and regulatory functions broadly, and the buyer may accept them because the language sounds essential. The question is always whether the carved out business uses that compliance capability or merely sits next to it on the allocation.
In services and technology businesses, labor is the base, so fully loaded rates are the issue. A seller can build benefits, facilities, and management layers into a per person or per hour rate. The buyer should test whether the loaded rate reflects the people actually doing the work or the entire cost structure around them.
The discipline is to challenge the cost base before the percentage. Ask the seller for the build up of each charge, separate true cost to provide from allocated overhead, and test the loaded rates and bundles. A modest mark-up on an honest base is fair. A modest mark-up on an inflated base is the same overcharge wearing a respectable percentage.
Use the sector lens to know where to look. In capital intensive deals, press the infrastructure base. In regulated deals, press the compliance allocation. In services deals, press the loaded labor rate. The mark-up benchmark tells the buyer whether the surface looks fair. The sector pattern tells the buyer where the base is most likely padded.
Done well before signing, this analysis sets the terms for the whole agreement. A buyer who establishes an honest cost base and a fair mark-up at the outset removes the largest source of silent overcharge across the life of the TSA, which is exactly the outcome the benchmark exists to support.
Many TSAs use a cost-plus structure with a mark-up in the range of 5 to 10 percent over the seller actual cost to provide. A figure in that band is defensible as a contribution to overhead. Mark-ups well above it usually signal either inflated allocation or a seller treating the TSA as a profit center.
The headline mark-up percentage varies less than buyers expect. What varies by industry is the cost base it sits on. Capital intensive sectors carry heavy infrastructure cost, regulated sectors carry compliance cost, and services sectors carry labor cost, so the same percentage produces very different absolute charges.
A high mark-up is visible and easy to challenge. An inflated cost base is harder to see, because it hides in allocated overhead, fully loaded labor rates, and bundled charges. Sellers often keep the headline mark-up modest while the real margin sits in how the underlying cost is calculated.
Challenge the cost base before the percentage. Ask for the build up of each charge, separate true cost from allocated overhead, and compare against typical ranges for the function. A modest mark-up on an honest cost base is fair. A modest mark-up on an inflated base is the same overcharge in disguise.
Separate true cost, mark-up, and the extension curve in one model.
Read the article →How allocated overhead inflates the base behind a fair mark-up.
Read the article →How extension premiums escalate and how to avoid the penalty.
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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.
A representative benchmark report on where TSA cost-plus mark-up belongs by service category, how to validate pass-throughs, and where the extension-fee curve becomes a penalty. On a representative $48M-revenue carve-out, reading the price stack the way the seller built it recovers $0.7M the headline discount never touches.
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