Buying a Business? Insist on a Transition Services Agreement

If you are buying a business, a smooth and seamless transition to new ownership is key to maintaining cash flow and securing the foundation on which to increase market share, add customers and grow revenue.

Often a buyer’s focus is on obtaining an agreement that bars a seller from competing with his former business, disclosing information about that business or about the buyer, and from soliciting the seller’s former employees.

Negotiation of a non-compete/non-disclosure/non-solicitation agreement can be contentious, making the relationship between buyer and seller adversarial rather than collaborative.  Enforcing a non-compete/non-disclosure/non-solicitation agreement is expensive and time-consuming, and the outcome is never certain.

In contrast, a transition services agreement can work to the advantage of buyer and seller.  A typical transition services agreement will require the seller to devote a specified number of hours or period of time to providing support and training to the buyer, helping a buyer to familiarize himself with employees and their roles in the business, and, most importantly, introducing the buyer to existing customers or clients, creating an opportunity for the seller to assure customers or clients of the buyer’s experience and competence, and establishing the basis for an existing client to continue to do business with the buyer.

Delivery of a transition services agreement can be made a condition to closing.  If the seller fails to sign and deliver the transition services agreement, the buyer would have the right to void the asset purchase agreement, something that a seller would most certainly want to avoid.  If a portion of the purchase is allocated to the transition services agreement and its payment made conditional on the satisfactory performance by the seller of his obligations under the agreement, a seller will be motivated to live up to his part of the agreement.

If you are a seller, offering a transition services can sweeten a deal, and provide an opportunity for a seller to take a victory lap and exit his business on a positive note.  Emotional benefits are hard to quantify, but should not be discounted, especially where a seller has devoted years of his life to building a business.  For a seller, going out on a high note might just be priceless.