Insights
When a business is carved out of a larger group, the seller usually keeps providing some services for a while under a transitional service agreement. It is a sensible bridge that lets the new business trade from Day 1 without having built everything first. The problem is that the bridge is often left standing far too long. A transitional service agreement that drifts becomes expensive, keeps the new business tied to its former owner, and holds back the value case. This guide explains how to plan and execute a clean exit.
By Christopher Fagan
Transitional service agreements are rarely cheap, and the pricing often steps up over time to encourage a prompt exit. Every month the new business stays dependent, it pays for services it should own and leaves strategic control in someone else’s hands. It also cannot fully redesign its own operations while it is still plumbed into the seller. The exit is where a carve out either becomes a genuinely independent business or stays a tenant in its old home.
You cannot exit what you have not mapped. The first step is a precise inventory of every service the seller is providing, what it costs, when it expires, and what the new business needs to have in place to replace it. Many carve outs discover here that the agreement is vaguer than they assumed and that some dependencies were never written down at all.
Services do not all have to end on the same day, and they should not. Some are simple to replace and can go early. Others, such as core finance or IT platforms, need a replacement stood up and tested first. The right approach is a sequenced plan with clear exit criteria for each service, so that nothing is switched off until the replacement is proven. Trying to exit everything at once creates risk, while leaving everything to the deadline creates panic.
Give the exit a named owner and a plan with dated milestones. Replace services in a deliberate sequence, proving each replacement before switching the old one off. Treat the exit as a chance to build the operating model the business wants, not a copy of the one it inherited. And track the cost of every month of delay, because that number is usually the thing that keeps the programme moving.
PEF supports private equity backed businesses through carve outs and the transitional service exits that follow. If you are tied to a seller and want to cut the cord cleanly, our private equity and infrastructure team and our delivery excellence practice can help you plan and deliver it. Get in touch to scope your exit.
It is an arrangement where, after a carve out, the seller keeps providing certain services to the new business for a defined period. It is a bridge that lets the business trade from Day 1 without having built everything first.
These agreements are rarely cheap and often step up in price over time. Every month of dependency means paying for services the business should own and leaving strategic control with the former owner, which holds back the value case.
Start with a precise inventory of every service, its cost and its expiry, give the exit a named owner, and replace services in a deliberate sequence, proving each replacement before switching the old one off.
If any of this is live for you right now, the senior people who wrote it are the people you would work with.