Beyond the SPA: Transition Services and Ancillary Agreements

The Share Purchase Agreement may sit at the centre of an M&A transaction, but it rarely tells the whole story.

A business does not operate through ownership alone. It depends on people, technology, premises, intellectual property, supply chains, banking arrangements, licences, shared services and commercial relationships. When ownership changes, particularly where a business is being separated from a larger group, some of those elements may not automatically follow the company on closing.

The SPA transfers the shares and allocates the principal transaction risks. Ancillary agreements make the transaction operational.

In a straightforward acquisition of a self-contained company, the ancillary documentation may be relatively limited. In a complex carve-out, however, the documents surrounding the SPA can become almost as important as the SPA itself.

A buyer may legally own the business at 9:00 a.m. on closing day and still discover that it cannot issue invoices, process payroll, access essential software or operate certain facilities without continuing support from the seller.

The legal question is therefore not only whether ownership can be transferred.

It is whether the business can actually function the morning after closing.

Why the SPA cannot solve everything

Suppose a multinational group sells one of its business divisions.

The division has its own employees and customers, but historically it has relied on the parent group for accounting, HR, cybersecurity, procurement, insurance, IT infrastructure and treasury.

Once the transaction closes, the buyer acquires the business. But those shared services do not necessarily move with it.

Recreating them immediately may be impossible.

The buyer may need several months to migrate the company’s systems, establish new banking relationships, transfer data, obtain software licences and integrate the business into its own infrastructure.

Rather than delaying the entire acquisition until every operational dependency has been eliminated, the parties can use contractual arrangements to manage the transition.

The most important of these is often the Transition Services Agreement, or TSA.

The TSA: keeping the business running after closing

Under a TSA, the seller agrees to continue providing specified services to the transferred business for a defined period after completion.

Typical services can include IT systems, finance and accounting, payroll, HR administration, procurement, logistics, cybersecurity, facilities management or other functions historically provided centrally within the seller’s group.

The commercial rationale is simple.

The buyer obtains ownership immediately, while the operational separation takes place gradually.

Consider a company that relies on the seller’s ERP platform to process orders and issue invoices. Migrating onto the buyer’s system may take six months.

Without a TSA, the buyer may either have to postpone closing or build a replacement system before it owns the company. With a TSA, closing can occur first and the migration can follow under an agreed contractual framework.

The TSA therefore provides a bridge between legal separation and operational independence.

Defining the services precisely

One of the greatest risks in a TSA is vagueness.

A provision stating that the seller will "continue providing IT services" is unlikely to be sufficient.

Which systems? Which users? What level of technical support? Who handles cybersecurity incidents? Who maintains licences? Does the service include upgrades? Is support available twenty-four hours a day or only during normal business hours?

The same issue arises with finance, HR and other shared functions.

The services should generally be described in sufficient detail for both parties to understand what the seller must actually provide after closing.

This is particularly important because the relationship has fundamentally changed.

Before closing, the seller’s central functions supported another company within the same group. After closing, those same teams may be providing services to a company owned by a third party.

What was previously managed informally now needs contractual precision.

Duration should reflect the separation plan

A TSA is intended to be transitional.

The buyer should eventually become operationally independent, either by building its own infrastructure or integrating the acquired business into its existing organisation.

The duration of each service should therefore be linked to a realistic separation plan.

Not every service needs to terminate on the same date.

Payroll may be migrated within three months. Accounting systems may require six months. A complex IT infrastructure may require twelve months or longer.

The agreement may therefore include different termination dates for different service categories, as well as mechanisms allowing the buyer to terminate individual services early once they are no longer required.

From the buyer’s perspective, flexibility is valuable because it should not continue paying for services it has successfully replaced.

From the seller’s perspective, certainty matters because it needs to know how long its personnel and infrastructure will remain committed to supporting a business it no longer owns.

A poorly planned TSA can become a source of frustration for both sides.

Pricing can be more complicated than it appears

How much should the buyer pay for transitional services?

One approach is to continue charging the historical cost allocation used before the transaction.

But historical allocations within a corporate group may not reflect the real cost of providing services to a separate third party.

The seller may therefore seek cost reimbursement, cost-plus pricing or predetermined fees for each service.

The parties should also consider extraordinary costs. If the buyer requests additional functionality, increased service volumes or bespoke support beyond the agreed scope, who pays?

From an advisory perspective, the important point is that TSA costs form part of the true economics of separation.

A buyer comparing acquisitions should not focus exclusively on the purchase price. If extracting a business from its existing group requires several million euros of transitional services, technology migration and standalone infrastructure, those costs affect the real investment required.

This is particularly important in carve-outs, where the cost of creating a standalone business can materially change the acquisition case.

Service standards and liability

The buyer will normally want reassurance that transitional services will be delivered to an appropriate standard.

But the seller may resist becoming a professional outsourcing provider with extensive service-level obligations and unlimited liability.

A common commercial starting point is that services should be provided broadly in a manner consistent with how they were provided to the business before closing.

Certain functions may nevertheless require more precise standards, especially where service failure could materially disrupt operations.

The TSA should also address responsibility where problems occur.

If the seller’s system fails and the target cannot process customer orders for three days, what remedies does the buyer have? Are there service credits? Is liability capped? Are certain categories of loss excluded?

The appropriate regime depends on the importance of the service.

The more critical the dependency, the less comfortable the buyer will be relying on vague standards and limited remedies.

A TSA should contain an exit strategy from day one

A TSA works best when it is negotiated together with a separation plan.

The objective is not simply to maintain the status quo after closing. It is to eliminate the dependency that made the TSA necessary.

For each material service, the parties should understand what needs to happen before the buyer can operate independently.

Which data needs to be migrated? Which software licence needs to be obtained? Which employees need to be hired? Which bank accounts need to be opened? Which supplier agreement needs to be transferred?

The TSA can then support those milestones.

This changes the mindset from "the seller will keep helping us" to "the parties have a defined programme for achieving independence".

That distinction matters because transitional arrangements have a tendency to become permanent if no one owns the separation process.

The best TSA is often the one that becomes unnecessary exactly when the parties expected it to.

IP licences: the business may use assets it does not own

Another common ancillary issue concerns intellectual property.

A business being acquired may use trademarks, software, patents, databases or know-how owned by another company within the seller’s group.

If those assets are not part of the acquisition, the buyer needs to determine whether they remain necessary after closing.

A licence may therefore be required.

In some cases the licence is temporary, allowing the buyer time to rebrand or migrate onto alternative technology.

In others it may be long term because the business depends structurally on intellectual property that remains with the seller.

The agreement needs to define scope, duration, territory, permitted use, sublicensing rights and termination.

Brand transition is a common example.

A business may continue operating under the seller’s trade name for several months after completion while the buyer introduces a new identity. A transitional trademark licence allows that use while imposing rules around how the brand may be displayed and when it must disappear.

Again, something that appears operational can become essential to the legal ability of the business to continue trading.

Supply and commercial agreements may survive the transaction

Sometimes buyer and seller remain commercial counterparties after closing.

A manufacturing business being sold may still depend on components produced by another part of the seller’s group. Alternatively, the acquired company may continue manufacturing products for the seller.

The transaction may therefore require a supply agreement, manufacturing agreement, distribution agreement or other commercial arrangement alongside the SPA.

These agreements can be particularly important where the historical relationship existed entirely within the same group and therefore was never documented on arm’s-length commercial terms.

Closing forces the parties to define that relationship properly.

Pricing, volumes, forecasts, minimum purchases, quality standards, delivery, warranties, liability and termination all need to be addressed.

The acquisition may therefore create a slightly unusual result: the parties stop being shareholders in the same group and immediately become important customers and suppliers of each other.

The legal documentation needs to anticipate that new relationship.

Management, retention and employment arrangements

People can also form part of the ancillary documentation.

A buyer may consider certain founders or executives essential to the value of the target and require them to remain involved after closing.

Their continuing relationship may be governed through new employment agreements, service agreements, retention arrangements or management incentive plans.

Where management rolls over equity, these arrangements will often interact with the Shareholders’ Agreement discussed in the previous article.

The economic package may include salary, bonuses and long-term incentives together with equity participation.

Legal advisers therefore need to understand how the different documents work together.

A management executive should not, for example, have one set of obligations under an employment agreement and inconsistent obligations under the shareholders’ documentation.

Likewise, restrictive covenants concerning competition, solicitation and confidentiality may appear across several transaction documents and need to be coordinated carefully.

Escrow agreements convert contractual protection into practical security

An SPA may provide that part of the purchase price is retained to support possible warranty or indemnity claims.

Where the relevant amount is held by an independent third party, an escrow agreement will usually govern how those funds are held and released.

The document may specify the amount deposited, the duration of the escrow, permitted investments, the claim process and the conditions for releasing funds to seller or buyer.

The principle is straightforward, but the mechanics matter.

If the buyer asserts a claim one week before the scheduled release date, does the entire escrow remain blocked or only the amount corresponding to the claim? What happens if the parties disagree? When can undisputed funds be released?

The escrow arrangement should support the risk allocation already negotiated in the SPA without creating an unnecessary second layer of uncertainty.

Financing and security documents can form another transaction layer

Where an acquisition is financed with external debt, the financing documentation may represent an entire parallel workstream.

The buyer may enter into facility agreements with lenders and grant security over shares, bank accounts or other assets. Intercreditor arrangements may be required where several layers of financing are involved.

Equity sponsors may provide commitment letters or guarantees supporting the buyer’s obligations.

These documents are not technically ancillary to every SPA in the same way as a TSA or escrow agreement, but they can be essential to completing the transaction.

This illustrates a wider point: the legal architecture of M&A extends well beyond the bilateral relationship between buyer and seller.

Lenders, insurers, management, landlords, licensors, suppliers and escrow agents may all become parties to documents required for the transaction to work.

Carve-outs make ancillary agreements particularly important

The significance of ancillary documentation becomes clearest in carve-out transactions.

When an entire standalone company is acquired, many operational relationships already sit inside the target.

When only a division is separated from a larger group, the business may rely on dozens of services and arrangements that historically existed outside its legal perimeter.

The buyer therefore needs to establish what it is actually acquiring and what still needs to be recreated.

Which employees belong to the business? Which contracts need to be transferred? Which systems are shared? Who owns the relevant data? Does the business have its own insurance? Does it have standalone financial statements? Which licences remain with the seller?

These questions affect valuation as well as documentation.

A business generating EUR 10 million of EBITDA inside a corporate group may not necessarily generate the same EBITDA once it must pay market prices for services previously provided centrally.

The buyer therefore needs to analyse the target not simply as it exists before closing, but as it will operate on a standalone basis afterwards.

The advisory perspective: operational separation is part of deal value

This is where ancillary agreements move beyond legal housekeeping.

Suppose two businesses each generate EUR 15 million of EBITDA and are offered at the same valuation.

Business A is fully standalone, with its own systems, personnel, contracts and infrastructure.

Business B depends extensively on the seller’s group and will require two years of transitional support, substantial IT investment and several new senior hires.

The headline financial performance may look identical.

The acquisition economics are not.

The second business carries greater separation cost, execution complexity and operational risk.

An adviser evaluating the transaction therefore needs to incorporate these factors into valuation, financing requirements and integration planning before signing.

The TSA should not be discovered after the SPA economics have already been agreed. The need for ancillary arrangements should emerge from diligence and feed directly into transaction structuring.

Beyond ownership transfer

A successful acquisition requires more than transferring title to shares.

The buyer needs a functioning business.

That may require transitional services, intellectual-property licences, new supply relationships, employment arrangements, escrow mechanisms and financing documentation.

Each agreement responds to a dependency or relationship that the SPA alone cannot fully regulate.

The more interconnected the target is with the seller, the more important these documents become.

They also reveal an essential truth about M&A execution: legal completion and operational separation are not always the same event.

The SPA may determine the exact moment ownership changes.

The ancillary agreements determine whether the business can continue operating once it does.

And particularly in complex carve-outs, that difference can determine whether a transaction that looks successful on closing day actually works in practice.