Key Takeaways

  • Buyers and sellers regularly face a 15-month duration mismatch, with buyers expecting 18 months of operational runway while sellers plan to exit after 90 days.
  • Market practice has converged on pricing transition services at cost or through flat monthly fees, rejecting seller attempts to treat TSAs as profit centers.
  • Cooley partner Danielle Fortier tracks how unaddressed employee attrition turns standard support costs into expensive third-party contractor bills during TSA execution.
  • Multi-year enterprise software renewals falling immediately before TSA expiration create unallocated liabilities if contract terms are deferred past the term sheet.

The 15-Month Expectation Gap at Term Sheet

Most carve-out friction does not stem from headline valuation. It stems from the messy tail of operational separation. When deal teams push Transition Services Agreement terms past the Letter of Intent stage, they walk into a predictable trap.

Buyers often assume they have acquired an 18-month cushion to stand up standalone IT, ERP, and payroll systems. Corporate sellers, looking to shed overhead and reassign corporate teams, often assume support wraps up within three months. Fortier notes that leaving these numbers unstated turns early agreement into late-stage gridlock: “We get into negotiating it and the sellers thought that that meant for 3 months and the buyer thought that that meant for 18 months. That's a huge gap. That's a very big business divide.”

Closing that 15-month divide inside definitive documents costs dealmakers leverage. The buyer lacks the operational infrastructure to close without seller systems, while the seller faces extended entanglement they never modeled into transaction costs. Resolving the schedule at the term sheet stage pins down the timeline before exclusivity burns away.

TSA Services Are Not Profit Centers

Pricing mechanics represent the second quiet breakdown in carve-out negotiations. Deal teams frequently leave service fees unaddressed until legal drafting begins, creating immediate disputes over cost structures.

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

Sellers occasionally attempt to pad internal allocations or tack on margins to compensate for the distraction of running someone else's back office. Yet market consensus firmly rejects the markup model. “Part of selling a business that is intertwined, where you can't deliver every piece of the business at closing in order to allow it to operate, there has to be some sort of TSA,” Fortier observes. “And that's not intended to be a profit enterprise.”

The standard market baseline remains direct cost reimbursement or a negotiated flat monthly administrative fee. When sellers push for margins, it signals misalignment on what is required to deliver a clean separation.

Hidden Liabilities: Employee Turnover and Software Cliff Events

Even when parties agree on duration and cost baselines, operational execution breaks down around labor and vendor licensing. Sellers rarely guarantee that specific personnel will stay behind to run back-office functions for a carved-out unit.

“What if the seller has a key employee who's necessary to providing the transition services who leaves, and then they have to replace that person with a much more expensive resource?” Fortier asks. “Those are all things we've seen come up.”

If the TSA contract fails to specify who pays for replacement labor, the seller absorbs runaway staffing fees or the buyer suffers operational degradation. A similar failure occurs when enterprise software licenses approach mandatory multi-year renewals during the final months of a TSA. If an ERP or cloud platform requires a three-year renewal commitment sixty days before the TSA expires, an unaddressed contract forces one party to swallow years of stranded license fees. Nailing down assignment rights, license renewals, and labor replacement caps at the LOI prevents operational drag from eating deal returns.

Why It Matters

Corporate carve-outs have accelerated as strategic sellers trim non-core divisions to defend margins in a higher-rate environment. PE buyers underwriting these assets cannot rely on loose LOI language to protect operating margins during separation. When deal teams treat TSAs as administrative cleanup rather than economic deal terms, transition costs erode enterprise value before the carved-out entity stands on its own.