Whether a seller chooses to stay with a company after its sale to help the buyer transition is a business decision that needs to be negotiated between the parties. The buyer and seller need to include a transition services agreement (TSA) to specify the tasks that sellers are responsible for, how long the seller is available, and whether a seller will be compensated for a transition period.
What Do Transition Services Agreement Cover?
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Duration:
The length of a transition services agreement often depends on factors such as the role of the specific employee in the seller’s company, the size and complexity of the target company, and whether an earn-out agreement is involved. Naturally, most sellers want to have shorter durations for their transition services agreements so they can get focus on the next phase of their life. However, if an earnout agreement is concerned, a seller may want to negotiate a longer transition period to match the earnout period timeline to ensure the earn-out benchmarks are met. -
Compensation:
In most basic transition services agreements, it is typical for a owner-seller to not be compensated for the transition period, particularly when the transition period is less than thirty days. Compensation for a basic transition period is typically part of the purchase price. However, if a target company’s employee, who is not an owner of the target company, is involved in the transition, then that employee should be compensated to avoid violations federal and state wage laws. If the parties transition extends beyond a basic transition period, the parties should include the terms for compensation to the seller. -
Seller’s Duties:
The transition period outlines the specific duties a seller is responsible for during a transition period. If a seller’s transition involves the earnout, then a separate employment agreement should be considered. However, in a basic transition, a transition services agreement should be sufficient.
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