TSA Pre-Signing Review
Plan the separation before the deal closes. Not after.
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The distinction between a TSA commercial agreement and a true commercial agreement decides how long the carved out business stays tied to its former parent. A TSA is a temporary instrument designed to be exited; a long term commercial agreement is a deliberate, market priced relationship the business may keep for years. Sorting which is which before signing is a core part of any sound TSA exit strategy, because the wrong classification either traps the buyer or strands a capability it still needs.
A TSA and a long term commercial agreement answer different questions. The TSA answers how the business keeps operating in the months immediately after close, while it builds the capabilities it does not yet have. The commercial agreement answers what relationships the business will deliberately maintain once it is fully independent.
The TSA is designed to disappear. Each service it covers should have an exit date, and the buyer measures success by how quickly the catalog empties. A commercial agreement is designed to last. It is entered into because the business genuinely wants the product or service on an ongoing basis, not because it is too early to provide it another way.
This purpose gap drives every other difference between the two. Once a buyer is clear on whether a given dependency is something to escape or something to keep, the right contract, pricing, and exit terms follow naturally. Confusing the purpose is what produces TSAs that overstay their welcome and commercial relationships that end before the business is ready.
TSA pricing is built on cost recovery. The seller is generally compensated for the cost it incurs to keep providing a service it would rather wind down, sometimes with a small mark-up. The logic is that the seller is doing the buyer a temporary favor, not running a profit center. Extension fees usually escalate over time to push the buyer toward exit.
Commercial pricing is built on the market. A long term agreement reflects what the service or product is worth on an open basis, with volume terms, indexation, and renewal pricing negotiated like any other vendor relationship. The seller, now a supplier, is entitled to a normal commercial margin because the buyer has chosen to keep buying.
Applying the wrong pricing model is costly in both directions. Treat a genuine commercial need as a TSA and the buyer may lose the service abruptly when the transition ends. Treat a transitional service as a commercial agreement and the buyer can lock into market priced terms for something it should have replaced cheaply within a year.
Some services that start inside a TSA should not simply end. If the seller provides something the carved out business will keep needing and cannot easily replicate or replace, the right move is to convert that service from a transitional arrangement into a standing commercial contract on proper terms.
The conversion decision should be made deliberately, not by default. The danger is drift: a TSA service quietly continues past its planned exit because no one built the alternative, and the parties keep extending it at escalating fees rather than negotiating the durable contract it should have become. That is the most expensive way to keep a service.
A clean approach is to flag conversion candidates during planning. For each seller dependency, decide whether the business will build the capability itself, source it from a third party, or keep buying it from the seller under a commercial agreement. The ones in the third category should be negotiated as commercial contracts on their own merits, separate from the TSA timetable.
In a TSA, the buyer wants to control the clock. Exit terms should let the buyer leave each service when it is ready, with reasonable notice and without punitive charges for early exit. The seller, wanting to be done, usually shares the goal of a clean and timely wind down, even if the two sides differ on pace.
In a commercial agreement, control of the clock is a negotiated commercial point. Term length, renewal, and termination rights all carry weight because the business may depend on the relationship. The buyer wants enough term to ensure continuity, but not so much that it is captive to a single supplier at uncompetitive prices.
Leverage also differs by timing. TSA terms are negotiated under deal pressure, when attention is on closing and the buyer has limited room. Commercial terms deserve their own negotiation, ideally with more time and a clearer view of the market, so the business is not locked into a long relationship simply because it was convenient to settle during the deal.
Before signing, classify every seller dependency as transitional or commercial. Transitional dependencies belong in the TSA with a planned exit. Commercial dependencies belong in standalone agreements with market terms. The act of forcing this classification surfaces the conversion candidates that otherwise drift into expensive extensions.
Negotiate the two on separate tracks. Settle the TSA to support a fast, controlled exit. Negotiate commercial agreements with the deliberation they deserve, recognizing they will outlast the transition by years and shape the cost base of the business long after the TSA is gone.
The test is simple. If the buyer wants the service gone as soon as it can be replaced, it is a TSA service. If the buyer wants to keep the service on purpose, it is a commercial agreement. Getting that judgment right before signing is what keeps a transition temporary and a relationship deliberate.
Purpose. A TSA is a temporary contract designed to be exited as the business builds its own capabilities. A long term commercial agreement is a deliberate, market priced relationship the business intends to keep. The TSA is something to escape; the commercial agreement is something to maintain.
A TSA is priced on cost recovery, compensating the seller for the cost of providing a service it would rather end, sometimes with a small mark-up and escalating extension fees. A commercial agreement is priced on the market, with a normal supplier margin, volume terms, and renewal pricing.
When the business will keep needing the service and cannot easily build or replace it. Rather than letting the service drift past its TSA exit at escalating fees, the parties should deliberately convert it into a standing commercial contract on proper market terms.
They have different economics, time horizons, and leverage. TSA terms are settled under deal pressure for a fast exit. Commercial terms shape the cost base for years and deserve a deliberate negotiation, so the business is not locked into a long relationship just because it was convenient to settle during the deal.
The temporary service bridge versus the lasting product supply contract.
Read the article →The planned path off each service. Why every catalog item needs one.
Read the article →The transition agreement versus the master services agreement that frames it.
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