TSA Pre-Signing Review
Catch the red flags before the seller's drafting hardens. Specialist work.
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TSA red flags in diligence are the seller-drafted patterns that quietly transfer cost and risk to the buyer. They look standard. They read like boilerplate. They behave like loaded clauses once the deal closes. The deal team that spots them during diligence has leverage to fix them. The deal team that signs them inherits years of operational friction. This article catalogs the eight most damaging patterns the firm sees and the redline language that neutralizes each one. The work sits inside the broader TSA due diligence practice.
The first red flag is catalog drafting that uses category descriptions instead of specific service lines. "IT support services." "Finance back office services." "HR administration." The seller's drafting team prefers this language because it gives the seller maximum flexibility on what is actually delivered. The buyer's exposure is the inverse. When a specific service the buyer expects is missing, the seller can claim the catch all category did not include it.
The redline replaces category language with explicit line items. Each system gets a line. Each process gets a line. Each support tier gets a line. The catalog grows from 30 vague entries to 200 explicit ones, which is the point. The seller delivers what is listed, nothing more, but the buyer also knows exactly what is committed.
Where the seller resists the granularity, the deal team should ask why. The honest answer is that the seller has not finished cataloging its own delivery. That is the seller's problem to solve before signing, not the buyer's risk to absorb after Day One. The buyer side advisor often delivers the catalog the seller could not produce.
The catalog should also include explicit exclusions. Anything the buyer thinks might be in scope but the seller does not intend to deliver should be listed as out of scope. Silence on a service is worse than an explicit exclusion because silence triggers post close disputes. The work pairs with service catalog rationalization.
The second red flag is cost-plus pricing without explicit cost base disclosure. The TSA states that prices are cost plus 10 percent. The TSA does not state what cost is. Sellers use this drafting to hide embedded margin inside the cost base. A service that should cost $300,000 monthly to deliver shows up at $440,000 cost plus 10 percent for $484,000.
The redline requires cost base disclosure at signing and ongoing transparency during the TSA. The buyer should be entitled to see the cost components: headcount, third-party licenses, allocated infrastructure, overhead allocation methodology. Audit rights should specifically allow the buyer to verify the cost base.
The mark-up percentage itself deserves scrutiny. Market rates run 5 to 15 percent for routine services. Anything above 15 percent should require specialist or scarce capacity justification. The deal team should benchmark the proposed mark-up against the firm's market data and challenge anything materially out of line.
Pass-through costs deserve separate treatment. Pass-through means the buyer pays actual third-party cost without mark-up. The redline should require pass-through to be billed against the underlying invoice with copies provided. Pass-through that is marked up is not pass-through. The work pairs with mark-up benchmarks.
The third red flag is an extension fee curve that escalates aggressively past the original exit milestone. Common seller drafting starts at 110 percent of base for the first extension month and ramps to 150 or 200 percent within a quarter. The structure is designed to make extension economically painful, which protects the seller from having to keep delivering services indefinitely. It also creates a multi million dollar bill if the buyer exits late.
The redline calibrates the curve to actual market data. A defensible curve might run 105 percent in the first three months past exit, 110 percent in months four through six, 115 percent in months seven through twelve. The escalation reflects the seller's real cost to continue, not a punitive multiplier.
The redline should also carve out seller caused delays from extension fees entirely. If the buyer is late because the seller failed to deliver knowledge transfer, the seller cannot bill extension fees. The cure mechanic should be explicit and operationally enforceable.
Hard exit dates should bound the extension structure. After the hard exit, the contract terminates regardless of buyer readiness. This puts pressure on both parties to make the transition work on schedule. The work pairs with extension fees explained.
The fourth red flag is service level commitments that look strong but break under load. Common patterns include monthly averages that mask weekly outages, measurement methodologies controlled solely by the seller, scheduled maintenance carve-outs without volume limits, and force majeure language broad enough to excuse routine misses.
The redline tightens the measurement and limits the carve-outs. SLA windows should match the buyer's actual operational sensitivity (typically weekly or daily for critical services). Measurement methodology should be defined in detail with both parties having access to monitoring data. Maintenance windows should be capped at a defined number of hours per month and scheduled within fixed windows.
Service credits should bite. Token credits of 1 to 2 percent do not change seller behavior. Material credits of 10 to 20 percent change behavior. The redline calibrates credits to the operational impact of a miss. Critical services warrant higher credits. Routine services can tolerate lower credits.
Termination rights for chronic SLA failure should be achievable. If the threshold to terminate is "five consecutive months of breach with no improvement plan," the seller can manage to one improvement plan every four months and never trigger termination. The threshold should be calibrated so persistent failure has a real consequence. The work pairs with service level clauses.
The fifth red flag is change control language that lets the seller propose unilateral changes or price changes mid contract. Common patterns include the seller's right to terminate any service on 30 days notice, to increase prices annually based on the seller's costs, to substitute service delivery resources without consultation, and to push process changes that the buyer must accept.
The redline establishes parity. Changes proposed by either party require mutual agreement. Pricing is locked except for explicitly defined indexation (typically capped at CPI or a defined inflation index). Resource substitutions require the seller to maintain delivery capability and notify the buyer for material changes.
The seller's right to terminate services unilaterally deserves particular attention. Sellers sometimes draft this as a flexibility provision. The buyer is operationally exposed if the seller exits services the buyer still depends on. The redline limits seller termination to material breach by the buyer (typically non payment after cure period) and removes any general discretionary termination right.
Change control governance should sit with the joint governance committee, not with the seller's discretion. The committee reviews proposed changes, prices them through defined methodology, and approves them through joint vote. The work pairs with change control mechanisms.
The sixth red flag is restricted audit rights. Sellers often propose narrow audit windows (one audit per year, 30 days advance notice, limited document scope) that make it operationally impractical for the buyer to verify pricing, service levels, or pass-through invoices. Without working audit rights, the buyer cannot recover overcharges.
The redline broadens audit scope and tightens timing. The buyer should be entitled to audit twice per year as a baseline. The buyer should be entitled to engage an independent third-party auditor under appropriate confidentiality. The audit scope should cover cost base, service level measurement, pass-through invoices, and change order pricing.
Audit costs should be borne by the seller where the audit identifies material findings. The threshold for cost shifting is typically 5 to 10 percent overcharge or a similar trigger. Without cost shifting, the buyer pays for the audit even when the seller's billing was wrong. The shift creates the right incentive for the seller to bill accurately.
Information rights between audits also need attention. The buyer should be entitled to monthly SLA reports, quarterly cost base reconciliations, and access to operational dashboards. The work pairs with audit rights.
The seventh red flag is the absence of a hard exit date and weak exit cooperation obligations. Without a hard exit, the TSA can extend indefinitely through successive extensions, with the seller collecting fees and the buyer losing transition momentum. Without exit cooperation obligations, the seller can deliver minimal knowledge transfer and force the buyer to figure out the systems alone.
The redline inserts a hard exit at 24 to 36 months from Day One with no further extension permitted. Critical services can sometimes warrant longer windows but those should be specific, not general. The redline also obliges the seller to provide knowledge transfer artifacts, documentation, runbooks, and training sessions during the final six months of the TSA.
Exit cooperation should be tied to specific deliverables. A documentation package by month minus 6. Joint training sessions in months minus 4 through minus 2. Parallel running in month minus 2. Sign off protocol in month minus 1. The redline names each deliverable so the seller cannot deliver vague PowerPoint slides and call it done.
Penalties for exit cooperation failure should be real. Service credits, exit fee reductions, or extension fee waivers for the buyer when the seller has not met its cooperation obligations. The work pairs with exit knowledge transfer.
The eighth red flag is liability caps that effectively eliminate seller exposure. Common patterns cap aggregate liability at 12 months of fees, exclude consequential damages, and carve out broad categories of harm from the cap (data loss, IP infringement, regulatory penalties, third party claims). The buyer ends up bearing operational risk that the seller created.
The redline calibrates the cap to the buyer's real exposure. For TSAs with significant operational dependency, aggregate caps of 24 months of fees or higher are defensible. The redline carves back into the cap categories that the seller had tried to exclude, particularly data protection breaches, regulatory penalties caused by seller misconduct, and material third party claims arising from seller acts.
Indemnity provisions deserve parallel attention. Sellers often draft narrow indemnities that protect the seller while leaving the buyer exposed. The redline ensures the buyer is indemnified against third party claims arising from the seller's delivery of services, regulatory exposures created by the seller, and data protection breaches in seller controlled systems.
Insurance requirements complete the picture. The seller should maintain professional liability, cyber, and general liability insurance at defined levels with the buyer as additional insured where appropriate. The redline lists the policies and minimum levels. The work pairs with warranty and liability caps.
All eight red flags are best caught during diligence. The redline survives because the seller has not yet hardened its position. The pricing concessions land because the seller still wants the deal to close. The structural protections get accepted because the seller has not yet started counting the savings from loose language.
Post close, the same fixes require amendments. Amendments require seller agreement, which the seller can decline. The buyer's leverage is much weaker post signing than pre signing because the deal has already closed and the seller no longer has commercial incentive to give ground. The redline pass is the work.
The buyer side advisor runs the redline pass as part of a structured pre signing review. Two to four weeks of focused work. Output is the redline package, a leverage memo identifying priority issues, and a Day One readiness preview. The engagement model is Fixed Fee or Portfolio Retainer. The work pairs with the TSA diligence checklist.
The eight red flags are not exhaustive but they are the most damaging patterns the firm sees across industries and deal types. Catching them changes the post close trajectory of the carved-out business. Missing them costs 200 to 400 basis points of operating margin and 6 to 12 months of exit timeline. The buyer side advisor exists to make the choice visible before the choice gets made by default.
The buyer-side TSA diligence checklist. Catalog, pricing, governance, exit, and the questions to ask before signature.
Read the article →Building a TSA cost model the deal team can defend. Base case, extension case, stranded cost overlay.
Read the article →Where TSA costs intersect the QoE adjustment list and how to keep the cost trajectory honest.
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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.
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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