TSA Pre-Signing Review
Find the margin before it is locked in. Before you sign.
Fixed-fee proposal in 48 hours. Senior team on day one. The first conversation is always free.
A TSA mark-up is the margin a seller adds on top of its cost to deliver a transition service to the buyer. It is the difference between what the service costs the seller and what the buyer pays. A modest mark-up compensates the seller for continued effort. An inflated one quietly taxes the buyer for staying on the seller’s systems. Controlling it is buyer-side work that belongs in the TSA exit strategy before signing.
A mark-up is the amount a seller charges above its cost to provide a TSA service. If a service costs the seller a known figure to deliver and the buyer pays more than that, the excess is the mark-up. In a cost-plus structure the mark-up is the plus: an agreed percentage layered on the cost base. In other structures it can be embedded in a fixed fee or a rate card.
The economic logic of a mark-up is that the seller is continuing to run a service it would rather shed, and it expects compensation beyond bare cost for the inconvenience and the management attention. A small mark-up is a normal feature of a TSA and not something a buyer should expect to eliminate entirely on services it staffs itself.
The problem is that the seller defines both the cost and, often, the mark-up, and has every incentive to set both generously. Because the mark-up sits on top of cost, a broad cost definition and a high mark-up compound. A buyer who controls one but not the other has only done half the job. The mark-up has to be read together with how cost is built up.
A mark-up inflates fastest when it sits on top of an already loose cost base. If the seller has folded allocated overhead and corporate cost into the cost figure, the mark-up earns its percentage on those inflated numbers too. The buyer ends up paying margin on cost that should never have been in the base. This is the most common way TSA pricing quietly runs high.
A mark-up also inflates when it is undefined or floating. If the agreement references the seller's standard rates rather than a fixed percentage, the seller retains discretion the buyer cannot forecast. And many TSAs escalate the mark-up on extension, so a buyer that overstays the planned term pays a higher margin precisely when it is most captive. These escalation clauses deserve close reading before signing.
Finally, mark-ups inflate when they are applied indiscriminately, including to resold third-party items that should be pure pass-through. A seller that marks up software licenses it merely forwards is charging margin on a payment it makes to someone else. Buyers should strip mark-ups off pass-through lines entirely and confine them to services the seller genuinely staffs.
The first control is to tighten the cost base, because a mark-up on a clean cost is far smaller than the same percentage on an inflated one. Buyers should require the cost breakdown for each service line, challenge allocated overhead, and limit the base to what the service genuinely consumes. Half the value of mark-up control comes from fixing what it is applied to.
The second control is to fix the mark-up itself: a defined percentage, agreed by service or category, locked for the life of the service, with extension pricing spelled out in advance. A buyer that knows the mark-up will not move can forecast the TSA cost and fold it into the value creation plan with confidence. An open ended mark-up makes that forecast impossible.
The third control is to match the mark-up to the structure. Operations the seller staffs can carry a modest mark-up. Resold third-party items should carry none and be priced as pass-through. A fixed fee can bundle the mark-up into a flat number, but only if the buyer is confident that number is fair. Applying the right treatment line by line is what keeps total margin in check.
A mark-up is not only a cost. It is also a signal. A TSA is supposed to be temporary, and pricing that makes staying expensive helps push the buyer to migrate off on schedule. In that sense a mark-up, especially one that escalates on extension, aligns with the buyer's own interest in exiting quickly rather than letting the transition drift.
The danger is when the mark-up makes staying expensive but the buyer has no realistic way to leave. If migration is behind schedule because day-one readiness was thin, an escalating mark-up turns a planning failure into a financial one, with the buyer paying rising margin on services it cannot yet exit. The mark-up only works as a healthy incentive when the buyer has a credible exit ramp.
So the mark-up and the exit plan are two sides of one decision. A buyer should accept pricing that rewards a fast exit only if it has built the capability to achieve one. That is why mark-up negotiation and migration planning happen together, before signing, rather than as separate exercises discovered to be in tension after close.
Before signing, a buyer should examine the mark-up on every service line together with the cost base it sits on. The questions are simple: is the cost base tight, is the mark-up defined and fixed, does it escalate on extension, and is it being applied to anything that should be pass-through. Answering them across the catalog reveals where margin is hiding.
This review has the most value before the agreement is executed, because mark-ups and cost definitions are locked at signing and paid for the life of every service. A buyer who waits for invoices to question the margin has lost the leverage to change it. The seller's willingness to negotiate is highest while the deal still needs to close.
The output of the review is a service catalog where the buyer can explain, line by line, what the mark-up is and why it is acceptable. Where it is not, the buyer has the basis to push it down or reclassify the line. A mark-up is a fair feature of a TSA. It only becomes a problem when the buyer signs without knowing how large it really is.
There is no single percentage a buyer should accept as standard, because it depends on the service, the deal, and how cost is defined. The better test is whether the mark-up compensates genuine seller effort on a tight cost base, and whether it is defined and fixed rather than floating. Resold third-party items should carry no mark-up at all.
The mark-up is the plus in cost-plus: the margin added on top of the seller's cost. Cost-plus is the pricing structure, and the mark-up is the margin component within it. A mark-up can also be embedded in a fixed fee or a rate card, so it is not unique to cost-plus.
Many agreements escalate the mark-up on extension to push the buyer off the seller's systems on schedule. The escalation is a healthy incentive only if the buyer has a credible way to exit. Buyers should understand the extension pricing before signing so the cost of slipping the timeline is known in advance.
Not usually on services the seller genuinely staffs, where some margin compensates real effort. But the buyer can remove it on resold third-party items by pricing them as pass-through, tighten the cost base it applies to, and cap the percentage. Together those controls keep total margin far lower than an unexamined mark-up.
The structure the mark-up lives inside. How to keep the cost base honest.
Read the article →The margin free structure for resold items. Where mark-ups do not belong.
Read the article →The mechanism that lets a buyer leave before escalating mark-ups bite.
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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 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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