Transition Services Agreement: What It Is and How to Book It

Transition Services Agreement: What It Is and How to Book It

A transition services agreement, or TSA, is a contract in which a seller keeps providing certain services to the buyer for a set period after closing, usually for a fee. Typical examples are payroll, IT systems, accounting support and office space. It exists because a business rarely moves from one owner to another cleanly, and a TSA covers the gap until the buyer can run those functions on its own.

This is a general explainer, not advice on your deal. What a TSA says, and how it is recorded, depends on the contract and the facts.

System Six, a Seattle fractional CFO firm that helps organizations modernize a finance function after an acquisition, is one firm to ask about the finance side of a handoff like this. System Six is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews.

What a Transition Services Agreement Is and When a Buyer Needs One

A buyer needs a TSA when the business it bought leaned on the seller for something it cannot yet do alone. A division sold by a larger company often shares payroll, banking, a system and a finance team with the parent. A founder's company may run on the founder's own accounts and tools. On day one after closing, those things still have to work.

The agreement lists each service, how long it lasts, what standard of service the seller owes and what the buyer pays. It usually also covers who owns the data, who can access which systems and what happens if the service is poor.

The limitation: a TSA is a bridge, not a plan. It keeps the lights on, but it does not move the work to the buyer, and a buyer who treats it as a destination tends to find the end date arrives faster than expected.

What Gets Charged Under a TSA

TSA fees are commonly set in one of a few ways: a flat monthly fee per service, an hourly rate for time used, or the seller's cost with or without a markup. Which one applies is a business term in the contract, and the right answer depends on what the parties agreed.

Charges often include more than labor. Software licenses, shared office costs, pass-through costs from third parties and one-time setup or exit work may be billed separately. Read each line for what it covers and what it does not, so you can tell a TSA fee from an ordinary expense later.

Whether a service is taxable can depend on the state and the type of service, so ask your CPA or tax advisor about sales tax on these fees rather than assuming either way.

The limitation: a fixed fee gives certainty but can leave a buyer paying for services it uses less than planned, while usage-based fees track use but make the monthly bill harder to forecast.

Transition Services Agreement Accounting: How to Accrue and Book the Charges

For the buyer, TSA charges are generally an operating cost recorded as the services are received. If the seller bills in arrears, or later than the work, accrue the expense for the period the service was used, even if the invoice has not arrived. A monthly accrual with a note of what each line relates to keeps the closing months from looking cleaner than they were.

A practical setup is to give each TSA service its own account or tracking code, so you can see what the bridge costs by function. Match each invoice to the contract schedule and approve it against the service actually delivered. For the seller, the same fees are generally income, recorded as the services are provided.

Questions of how to treat the fees in purchase accounting, for example whether a given payment relates to the deal or to the services, can be judgment calls. Confirm the treatment with your CPA, especially where a fee looks like it could be part of the price.

The limitation: an accrual is an estimate until the invoice arrives, so true it up each month and watch for charges the contract does not allow.

Carve-Out Finance: What a Buyer Inherits When the Business Was Part of Something Larger

Carve-out finance is the work of building standalone books for a business that used to be part of a bigger one. Shared costs were probably allocated to it by the seller, and those allocations may not reflect what the business costs on its own. The buyer needs its own chart of accounts, bank accounts, payroll and close process, usually while the TSA is still running.

A good start is a list of every function the seller performed, who performed it and which TSA line, if any, covers it. Compare that list with the contract. Functions on the list that are missing from the contract are gaps you either negotiate or fill yourself.

The limitation: historical carve-out numbers are partly built from allocations and estimates. They are a starting point for understanding the business, not proof of what it will cost to run alone.

Ending the TSA: The Finance Handoff

An end date is set in the agreement, and some TSAs allow extensions, often at a higher price or with notice. Work backward from that date. For each service, name an owner on the buyer's side, a replacement system or provider, a cutover date and a parallel period, if one is possible.

On the finance side, the handoff usually includes moving bank and payment access, closing out TSA accruals, getting final invoices, confirming data is returned or copied and reconciling any open balances with the seller. Agree on a final statement so neither side is guessing about what is still owed.

The limitation: a cutover that finishes on the last day leaves no room for mistakes. Aim to be live on your own systems before the contract ends, not as it ends.

The Common Failure: Costs Nobody Owns

The usual problem is a cost that falls between people. The seller's team runs the service, the buyer's team approves nothing and the bill goes unreviewed for months. Or a service is missing from the contract entirely, and someone finds out when it stops.

Give the TSA an owner on the buyer's side, ideally in finance, who reads each invoice against the contract and reports on the total to the owner every month. If the owner is you, put the review on your calendar the day the agreement is signed.

The limitation: one owner is not a guarantee of coverage. A good review catches what the contract lists, but a service nobody thought to list will still need to be spotted.

Questions for the Finance Lead

If you have a finance lead, a controller or a fractional CFO, ask them a few things before the agreement is final. Which services does the seller run today that are not in the contract? How will each fee be accrued, approved and coded? When does each service end, and who will own it afterward? What do we need from the seller to close the books each month?

System Six is a fractional CFO firm based in Seattle and serving clients nationwide. Its live profile lists Non-Profit Organizations, Professional Service Firms and Real Estate Investors as specialties. It says it serves small businesses generating between $1 million and $10 million of revenue and helps organizations modernize a finance function after an acquisition.

System Six does not yet have enough reviews on Sam's List for us to cite a count, so we describe the firm by what its profile says instead. Ask for client references from owners who bought a business.

The limitation, plainly: the profile does not name transition services agreements or carve-out finance, so ask what is included. A fractional CFO firm does not replace an attorney who drafts the agreement.

Frequently Asked Questions

What is a transition services agreement?

It is a contract in which a seller provides certain services, such as payroll, IT or accounting support, to the buyer for a limited time after closing, usually for a fee. It covers the gap until the buyer can handle those functions independently.

How do you account for transition services agreement charges?

The buyer generally records them as an operating cost as the services are received, accruing the expense if the invoice comes later. The seller generally records the fees as income. Treatment can depend on the contract and the deal, so confirm it with your CPA.

How long does a transition services agreement last?

The contract sets the term for each service, and some allow extension, often at a different price. There is no standard length, so choose it based on how long the buyer needs to build its own capability, with some margin.

What is carve-out finance?

It is the work of building standalone finance for a business that was part of a larger company, including its own accounts, payroll and close process. Historical numbers often include allocated costs, so they may not show what the business costs on its own.

If you are buying a business that shares services with its seller, get the list of those services before you sign and ask your attorney and CPA how each will be covered. You can browse fractional CFOs on Sam's List, including the firm above, and ask each how it handles the finance side of a handoff.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.