TSA Pre-Signing Review
Plan the separation before the deal closes. Not after.
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A manufacturing supply agreement and a TSA are often confused in a carve-out because both keep the carved out business dependent on the seller after close, but they do fundamentally different jobs. The TSA is a temporary scaffold that keeps the business running on borrowed services while it stands up its own. The supply agreement is a lasting commercial contract for product the business will keep buying. A disciplined TSA exit strategy treats them as separate instruments with separate exits.
A Transition Services Agreement is a time limited contract under which the seller continues to provide operational services to the carved out business after close. Those services are things the business cannot yet do for itself: running payroll, hosting applications, processing transactions, supporting end users. The TSA exists because operational separation rarely finishes by the closing date, so the seller keeps the lights on while the buyer builds independence.
The defining feature of a TSA is that it is meant to end. Every service in the catalog should have a planned exit date, and the agreement as a whole should have a clear horizon, often six to eighteen months with defined extension options. Pricing is built around the seller recovering its cost to provide the service, sometimes with a modest mark-up, not around earning a margin on an ongoing trade.
A TSA is also broad and shallow. It can cover dozens of small services across IT, finance, HR, and operations, each one a stopgap rather than a strategic relationship. The buyer wants every one of those services gone as fast as it can replace them, because each is a cost and a dependency that holds up full ownership of the business.
A manufacturing and supply agreement, sometimes abbreviated MSA and not to be confused with a master services agreement, governs the ongoing supply of physical product between the seller and the carved out business. It applies when one party will keep making goods, components, or materials that the other needs to run its business well beyond the transition period.
Unlike a TSA, a supply agreement is a genuine commercial relationship that both parties may want to continue. If the seller owns a plant that produces a key input, or the carved out business owns the facility the seller still relies on, neither side can simply walk away on a fixed exit date. The agreement sets volumes, specifications, pricing, lead times, and quality terms for product that may flow for years.
Because it is commercial rather than transitional, a supply agreement is priced on market terms, not cost recovery. It carries its own service levels, forecasting obligations, and termination provisions, and it survives long after the TSA has been exited. Treating it as a transition artifact that should be unwound quickly is a common and expensive mistake.
The first difference is intent. A TSA is a temporary necessity the buyer wants to escape. A supply agreement is an ongoing relationship the buyer may want to protect. Confusing the two leads buyers to either drag out a TSA they should exit or rush out of a supply arrangement they actually need.
The second difference is duration and pricing. The TSA is short and priced at or near cost, with extension fees that escalate to discourage delay. The supply agreement runs on a commercial horizon with market based pricing, volume commitments, and renewal terms. A buyer who applies TSA cost logic to a supply contract will misjudge the economics of both.
The third difference is leverage. TSA terms are usually negotiated under deal time pressure, where the buyer has limited room to push. Supply terms deserve a separate, deliberate negotiation because they shape the cost base of the business for years. Folding supply terms into the TSA negotiation, or vice versa, almost always shortchanges the larger commercial question.
In practice the two agreements often touch. A seller may provide both transition services and ongoing product supply to the same carved out business, and the boundary between them can blur. A service that looks transitional, such as the seller managing procurement for a raw material, may need to convert into a permanent supply arrangement rather than simply ending.
The risk at this seam is that a capability falls through the gap. The buyer plans to exit a TSA service on the assumption that the business will source the input itself, only to discover there is no supply contract in place and no alternative supplier qualified. The transition ends, the supply does not, and the business is exposed.
Managing the seam means mapping every seller dependency before signing and deciding, for each one, whether it ends with the TSA or continues under a supply agreement. The two contracts should be drafted together so that nothing essential is governed by neither, and nothing temporary is locked into a contract built to last.
Treat the TSA and the supply agreement as two distinct negotiations with two distinct objectives. The TSA objective is a tight catalog, fair cost recovery pricing, and a credible exit ramp for every service. The supply objective is durable commercial terms that protect the cost base and continuity of a relationship the business depends on.
Sequence the exits deliberately. TSA services should exit on a schedule the buyer controls, ideally faster than the seller would prefer. Supply commitments should be set to a horizon that gives the business time to qualify alternatives if it ever wants them, without leaving it captive to a single source at uncompetitive prices.
Above all, do not let deal pressure collapse the two into one rushed document. The TSA is the bridge the buyer crosses and dismantles. The supply agreement is the road the business keeps driving. Getting the distinction right before signing protects both the transition budget and the long run economics of the carved out business.
No. A TSA is a temporary contract for operational services the carved out business cannot yet perform itself, priced at or near cost and built to end. A manufacturing and supply agreement is a lasting commercial contract for physical product, priced on market terms and meant to continue. They serve different purposes and exit on different timelines.
A capability can move from one to the other. A seller might provide procurement of a material as a TSA service at first, then convert it into a permanent supply agreement. The key is to decide deliberately whether each dependency ends with the TSA or continues commercially, so nothing essential is left ungoverned.
Because they have different economics and time horizons. TSA terms are settled under deal pressure and aim for a fast, low cost exit. Supply terms shape the cost base for years and deserve a deliberate commercial negotiation. Folding them together usually shortchanges the larger supply question.
The business can lose access to a critical input. If a buyer exits a TSA service expecting to self source a material, but no supply contract or qualified alternative exists, the transition ends while the dependency remains. Mapping every seller dependency before signing prevents this gap.
When a transition service should convert into a lasting commercial contract.
Read the article →The master agreement and the schedule that lists each service. How they fit.
Read the article →The sale versus the separation. Why the buyer lives with the carve-out.
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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.
A representative $200M-revenue manufacturing carve-out runs a Transition Services Agreement across nine functions while three plants keep shipping. The moves below cut the exit from an 18-month drift to an 11-month managed exit and remove $3.0M of mark-up and stranded cost — without stopping a single production line.
One tactic, one benchmark, or one pattern from a recent buyer-side engagement. Short. Signal heavy. Free.
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