Transition Services Agreements: What Sellers Commonly Agree to Do After Closing in Ontario

Closing a business sale rarely means the seller disappears the next morning. Buyers frequently want — and sellers frequently agree to provide — a defined period of help transitioning the business, formalized in a Transition Services Agreement (TSA) or similar post-closing covenants layered into the purchase agreement. Understanding what these arrangements typically cover, and how they interact with non-compete and non-solicitation obligations, helps both sides negotiate a workable handover.

Why Sellers Agree to Help After Closing

A buyer taking over a business — especially one where the seller was deeply involved in day-to-day operations, key customer relationships, or specialized knowledge — faces real operational risk if the seller simply walks away at closing. A transition period addresses that risk directly:

• Knowledge transfer. The seller may be the only person who understands certain systems, supplier relationships, or informal processes that were never fully documented.
• Customer and supplier continuity. An introduction from the outgoing owner can matter far more to a key relationship than a form letter from the new one.
• Regulatory or licensing continuity. In some industries, a departing owner's credentials or relationships with regulators smooth over a period the buyer has not yet built independently.
• Deal economics. Sometimes a seller's continued involvement is tied to earn-out or holdback provisions, giving the seller its own incentive to see the transition succeed.

What a Transition Services Agreement Commonly Covers

• Scope of services — what, specifically, the seller will do (introductions, training, answering questions, limited operational involvement) versus what is out of scope
• Duration — a defined period after closing, rather than an open-ended commitment
• Time commitment — whether the seller is expected to be available a set number of hours or days, or simply reasonably available on request
• Reporting relationship — whether the seller is acting as an independent contractor, a consultant, or in some cases a short-term employee, which has its own legal and tax implications
• Compensation, if any — whether the transition support is paid, unpaid, or bundled into the purchase price, which the parties negotiate as part of the broader deal economics
• Termination rights — circumstances under which either party can end the arrangement early
• Confidentiality and use of information — since the seller may still have access to sensitive post-closing business information during the transition

How a TSA Interacts With Non-Compete and Non-Solicitation Obligations

This is where transition arrangements intersect with a separate but related area of law. Since October 25, 2021, general employee non-compete agreements have been unenforceable under the Employment Standards Act, 2000. There is a narrow business-sale exception: where the seller becomes an employee of the purchaser as part of the transaction, a non-compete can still be used. If the transition arrangement is structured as the seller becoming a short-term employee rather than an independent contractor, this exception may become relevant — which is exactly why the legal characterization of the transition role matters, not just its practical description.

Non-solicitation and confidentiality obligations are treated differently under the ESA and remain generally enforceable, subject to ordinary common-law reasonableness limits, regardless of whether the seller is an employee, contractor, or simply bound by covenants in the purchase agreement itself.

Drafting Considerations for a TSA

• [ ] Define the scope of services narrowly enough that both sides know what is expected, and what is not
• [ ] Set a clear end date or defined milestones, rather than an indefinite arrangement
• [ ] Decide the legal characterization of the relationship (contractor, consultant, or employee) deliberately, not by accident — it affects tax treatment, liability, and whether a non-compete exception can apply
• [ ] Address compensation structure explicitly, even where the parties intend the support to be unpaid or bundled into price
• [ ] Coordinate the TSA with any non-compete, non-solicitation, or confidentiality covenants elsewhere in the purchase agreement so the documents do not conflict
• [ ] Build in an exit mechanism if the working relationship during the transition period does not go smoothly

Frequently asked questions