TSA Pre-Signing Review
Pressure-test the cost base before it is locked. Before you sign.
Fixed-fee proposal in 48 hours. Senior team on day one. The first conversation is always free.
Cost-plus TSA pricing means the seller charges the buyer the cost of delivering a transition service plus an agreed margin on top. It is one of the two pricing structures buyers meet most often, and it sounds fair until you look at how cost is defined and how the margin is set. Pinning both down is buyer-side work that belongs in the TSA exit strategy before signing, while the buyer still has leverage to shape the terms.
Under cost-plus, the price of a TSA service has two components: the seller's cost to provide it and a margin added to that cost. If the seller's fully loaded cost to run a payroll service for the NewCo is a known monthly figure, the buyer pays that figure plus, say, an agreed percentage. The structure is meant to compensate the seller for delivering a service it no longer wants to run, without turning the TSA into a profit center.
The appeal of cost-plus is that it ties the charge to an underlying reality rather than a number plucked from the air. In principle the buyer pays close to what the service actually costs. In practice the two moving parts, the cost base and the margin, are both negotiable and both easy for a seller to define in its own favor if the buyer does not press.
Because the seller controls the cost data, cost-plus puts the burden on the buyer to understand and challenge how cost is built up. A buyer who accepts the seller's cost figures without inspection is accepting a price it cannot verify. The work is making the cost base transparent and the margin defensible before the agreement is signed.
The single most important question in a cost-plus TSA is what goes into cost. A narrow, defensible cost base includes the direct labor, the software, and the run cost genuinely consumed in delivering the service to the NewCo. A loose cost base sweeps in allocated overhead, management time, and shared corporate cost that the seller would incur whether or not it served the buyer.
Sellers have a structural incentive to define cost broadly, because every dollar added to the cost base earns the margin on top and recovers overhead the seller would otherwise carry alone. Buyers should ask for the breakdown of each service cost: what is direct, what is allocated, and on what basis the allocation is made. Allocated cost that does not change with the service should be challenged.
This is where independent review earns its fee. A buyer-side advisor reads the cost breakdowns across the service catalog, flags allocations that look like overhead recovery, and pushes the cost base back toward what the service truly consumes. The difference between a tight and a loose cost definition, compounded across dozens of service lines and months of duration, is often the largest single number in a TSA negotiation.
The margin in cost-plus is the seller's compensation above cost. A reasonable margin reflects the modest effort of continuing to run a service the seller already operates, not a market return on a competitive offering. Buyers should expect a defined percentage, agreed line by line or by service category, rather than a vague reference to the seller's standard rates.
The margin should also be fixed for the life of the service. Buyers want to avoid a structure where the margin floats or where the seller can revise cost assumptions mid transition. A defined margin on a transparent cost base gives the buyer a price it can forecast, which matters because TSA charges flow straight into the NewCo's operating costs and the buyer's value creation plan.
Margin is also where cost-plus interacts with extension fees. Many TSAs escalate pricing if the buyer overstays the planned term, sometimes by raising the margin on cost. A buyer should understand how the margin behaves on extension before signing, so that the cost of slipping the schedule is known rather than discovered when the invoice arrives.
Cost-plus is one of several ways to price a TSA service. Pass-through pricing charges the buyer the seller's actual third-party cost with little or no margin, which suits services the seller merely resells. A fixed fee sets a flat charge regardless of cost, which gives the buyer certainty but requires confidence that the fixed number is fair. Each structure shifts risk differently between the parties.
For services the seller delivers with its own people and systems, cost-plus is common because it links the charge to real cost while compensating the seller for the effort. For services the seller buys from outside and merely passes on, pass-through is usually fairer to the buyer because there is little seller effort to reward. Matching the structure to the service is part of getting the pricing right.
The point is not that one structure always wins. It is that the buyer should know which structure applies to each service line, why, and what it implies for the total cost of the transition. A service catalog priced on a mix of structures is normal. A service catalog where the buyer cannot explain why each line is priced the way it is signals work left undone.
The leverage to fix cost-plus terms is highest before signing, while the deal is still live and the seller wants it closed. Once the TSA is executed, the cost definitions and margins are locked, and the buyer is paying them for the life of every service. Buyers who wait until they see the first invoice to question the pricing have already lost the negotiation.
Concretely, a buyer-side team requests the cost breakdown for each service line, tests the allocations, confirms the margin is defined and fixed, and models the total cost across the planned duration including any extension scenarios. The output is a clear view of what the TSA will cost and where the seller's cost definition is doing the work.
Done before signing, this review often pays for itself many times over by tightening cost bases and capping margins across the catalog. It also gives the buyer a credible basis to renegotiate if the seller's figures do not hold up. Cost-plus is not a bad structure. It is only a bad deal when the buyer signs without understanding what cost means.
Neither by default. Cost-plus is fair when the cost base is tight and the margin is modest and fixed. It becomes expensive when the seller defines cost broadly to recover overhead and the margin floats. The outcome depends entirely on how the two components are negotiated before signing.
Margins vary by deal, service, and seller, so there is no single standard a buyer should accept as given. The more useful test is whether the margin reflects the modest effort of continuing an existing service rather than a market return. Buyers should require a defined, fixed percentage rather than a reference to standard rates.
Cost-plus adds a margin to the seller's cost of delivering a service with its own resources. Pass-through charges the seller's actual third-party cost with little or no margin, which fits services the seller merely resells. Pass-through usually favors the buyer where there is little seller effort to compensate.
It should not, if the agreement is written well. Buyers want the cost definition and margin fixed for the life of each service, with any extension pricing spelled out in advance. A structure that lets the seller revise cost assumptions mid transition transfers risk to the buyer and should be resisted before signing.
The structure for services the seller resells. Where it beats cost-plus for buyers.
Read the article →The margin sellers add on top of cost. How to test whether it is defensible.
Read the article →Where every service line gets its own price, basis, and exit date.
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