Key Takeaways

  • Letter of intent terms that specify a transition service agreement without setting exact duration routinely produce clashes, with sellers anticipating a 3-month exit while carve-out buyers require 18 months.
  • Sellers often treat transition services as revenue opportunities by attempting to mark up vendor contracts, directly clashing with private equity buyers who model support strictly at cost.
  • Contract renewal minimums create unallocated liabilities when a buyer needs an extra month of service, forcing the parent to fund an entire 12-month enterprise software renewal.
  • Human capital flight poses direct financial risk during carve-out execution: when a parent company employee running a transitional system departs, replacement staffing costs escalate quickly.

The Duration Gap Between Sellers and Carve-Out Buyers

Sponsors pursuing corporate carve-outs often discover that basic alignment on transition support collapses once drafting begins. Danielle Fortier, partner at Cooley, observes that deal teams routinely sign a letter of intent agreeing that a transition service agreement is required without establishing the calendar timeline.

“We see situations where the parties are discussing a carveout and both sides agree that some TSA will be needed,” Fortier explains. “Then we get into negotiating it, and the sellers thought that meant for 3 months, and the buyer thought that meant for 18 months. That is a huge gap.”

For a corporate seller, 18 months of ongoing operational entanglements ties up internal human resources and delays corporate separation. For the buyer, a 3-month window leaves insufficient runway to stand up dedicated enterprise resource planning systems, payroll functions, or supply chain infrastructure. Pushing that negotiation past the LOI converts operating models into guesswork.

Cost Recovery Versus Margin in Carve-Out Pricing

Pricing models represent the second major point of friction in carve-out documentation. Deal models constructed by private equity sponsors routinely assume that corporate parents will deliver transitional support at cost. Sellers, however, frequently view post-closing operational support as a commercial service line deserving of standard vendor markups.

“We have transactions where no one talked about how TSA services were going to be priced at the beginning,” Fortier notes. “Then when we're drafting the TSA, the buyer is like, 'Well, obviously we're just getting everything at cost,' and the seller says, 'Well, actually, we were planning to mark that up.'”

Fortier points out that market practice treats these arrangements as survival mechanisms rather than margin engines. “Part of selling a business that is intertwined, where you cannot deliver every piece of the business at closing in order to allow it to operate, there has to be some sort of TSA,” Fortier says. “It is not intended to be a profit enterprise. It is just intended to carry the buyer through.” When sellers seek margin on back-office operations, it alters post-closing cash outflows.

Unallocated Liabilities in Vendor Renewals and Staff Attrition

Beyond basic duration and baseline fee structures, Fortier tracks specific contractual edge cases that create post-signing liabilities. Friction appears when fixed-term software or vendor contracts expire late in the transition period.

“What if there is a service that a seller is providing, and there is one month left on the TSA, what if they have to renew that contract and pay for a whole another year?” Fortier asks. “Who bears that cost?”

A single enterprise license renewal for twelve months can alter project economics for a division needing only four weeks of bridge access. Similar disputes emerge when key personnel leave the corporate parent mid-transition. If an internal engineer or payroll manager departs, the parent must source an external contractor at triple the hourly rate. Without an explicit allocation mechanism agreed during initial negotiations, neither party is willing to absorb the price difference.

Why It Matters

Carve-out deal volume is accelerating as corporate valuation spreads persist, but buyers face compressed equity returns when operational separation costs get deferred to late-stage documentation. Sponsors who treat transition agreements as administrative formalities risk post-closing margin leakage. How deal teams contract around short-tail services and talent attrition now sets the true purchase price of complex divestitures.