Legal Red Flags That Can Make Your Business Harder To Acquire

A business being acquired can be a great opportunity for both the business and the buyer.

However, buyers look at much more than revenue before making an offer. They will want to understand who owns the business and its assets, how secure its key relationships are and whether there are any legal problems sitting beneath the surface.

Missing contracts, unclear ownership or unresolved compliance issues can quickly raise questions about the value and risk of the deal. Whether you are thinking about an acquisition now or further down the line, it is worth knowing which legal red flags could make your business harder to acquire - and what you can do about them first.

The Business Doesn’t Clearly Own What It’s Selling

This might sound obvious, but ownership can get messy surprisingly quickly.

A business may use a trade mark, piece of software, design, website or other valuable asset every day without actually owning all of the rights to it.

Copyright created by an employee in the course of their employment will generally belong to the employer. However, if you paid a freelancer, developer or agency to create something for the business, the creator will usually own the copyright unless the rights were transferred under the contract or a separate assignment.

There can also be problems where intellectual property was created by a founder before the company existed and never formally transferred into the business.

Third-party software, templates or licensed materials create another layer of complexity. Your business may have permission to use something without actually owning it or having the right to transfer that permission to a buyer.

Where intellectual property ownership needs to be moved into the business, an IP Assignment Deed can formally record the transfer.

If a buyer is paying for your brand, technology or other key assets, they will want confidence that the business actually owns - or has suitable rights to use - what it says it does.

The Revenue Looks Better Than The Contracts Behind It

Strong revenue is obviously a good sign, but a buyer is likely to look at what is actually holding that revenue together.

For example, your biggest customer might have worked with you for five years without clear written terms setting out what each side has agreed. The relationship may still be legally binding, but unclear or poorly documented terms can make it much harder for a buyer to understand how secure that revenue really is.

Another customer might bring in a large portion of your revenue but be able to terminate their agreement at short notice. On paper, the relationship is valuable. Legally, it may offer the buyer much less certainty.

This does not mean every customer needs to be locked into a long-term contract. It does mean the agreements behind your important relationships should reflect how the business actually operates.

Buyers may also look at supplier, distribution and other commercial agreements the business relies on. If a key supplier can stop providing an essential product at short notice, that can matter just as much as the customer side of the business.

A buyer is likely to look beyond how much revenue the business is making and ask how likely that revenue is to continue. Making sure your key commercial agreements are clear, current and properly documented can make that picture much easier to understand.

Too Much Of The Business Depends On The Founder

A founder being important to their business is hardly unusual. The problem is when the business cannot really function without them.

Perhaps the founder personally manages the biggest customers, holds an important licence or is the only person with access to certain systems. Some contracts or business assets may even sit in the founder’s personal name rather than the company’s.

Customers may also associate the business so closely with the founder that it is unclear whether those relationships will continue once they leave.

This can become particularly important during an acquisition because the buyer is paying for a business that should be able to continue after ownership changes.

Think about what would happen if the founder stepped away tomorrow. Could the team manage the main customer relationships? Does the company control its own accounts, records and important assets? Is key knowledge documented somewhere other than the founder’s head?

The founder can still be an important part of the business. The question is whether the business could continue operating if they were no longer involved day to day.

There Are Liabilities A Buyer Could Inherit

Some legal problems are obvious. Others can sit quietly in the background until someone starts asking questions during due diligence.

There could be an unresolved customer complaint, a supplier dispute, an employment claim or money the business may still owe. A potential legal problem does not need to have reached court before it becomes relevant to a buyer.

Employment issues can be particularly important.

In a share sale, the buyer will generally acquire the company together with its existing employment liabilities. In a business or asset sale, the Transfer of Undertakings (Protection of Employment) Regulations, commonly known as TUPE, may apply and transfer employees and certain employment rights and liabilities to the buyer.

Underpayments, unresolved grievances, poorly documented employment terms or other workplace problems may therefore become issues a buyer wants to understand before proceeding.

The same applies to customer, supplier and intellectual property disputes. How much of a particular risk ultimately sits with the buyer will depend on the structure and terms of the transaction, but unresolved problems are likely to become part of the negotiation.

A buyer might seek stronger warranties or indemnities, negotiate the price or require the seller to remain responsible for a particular issue.

A problem you already understand and can explain is generally easier to deal with than one the buyer unexpectedly discovers halfway through due diligence.

The Business Has Compliance Gaps

A business can grow much faster than its legal setup.

A licence that was put in place years ago might have expired. The way you collect customer information may have changed while your privacy documents stayed the same. The business could have expanded into a new service or regulated area without considering whether additional requirements now apply.

These gaps matter because a buyer is not only interested in what the business has done in the past. They also need to understand whether they can continue operating it without immediately having to fix legal problems.

Data protection is a good example.

If your business processes personal data, its practices should reflect current UK data protection law, including the UK GDPR and Data Protection Act 2018 as amended by the Data (Use and Access) Act 2025.

That includes being clear about why information is collected and used, keeping people properly informed and protecting their information appropriately.

An acquisition can create additional data-sharing questions too. The parties may need to consider what information will be transferred, why it was originally collected, whether there is a lawful basis for sharing it and what customers or other individuals need to be told.

If your business has a Privacy Policy, it should reflect what the business actually does today rather than how it operated several years ago.

The same applies to industry-specific licences, registrations and approvals. Something held by the wrong person, allowed to expire or never obtained in the first place can become much more noticeable once a buyer begins looking closely.

The exact requirements will depend on the business. The important thing is that its legal setup has kept pace with its growth.

Something Could Get In The Way Of The Acquisition

Even where the business looks attractive, there may be people or arrangements that need to be dealt with before a buyer can actually complete the acquisition.

A landlord, lender, major customer or other third party may need to consent. Important commercial agreements may also contain change-of-control provisions that give another party rights when ownership of the company changes.

The ownership of the company itself can create complications too.

Perhaps shares were promised to someone years ago but never properly documented. There could be options, different share classes or other arrangements that need to be understood before anyone can work out who needs to approve or participate in the deal.

The company’s articles of association and any Shareholders Agreement should also be checked for restrictions on transferring shares, approval requirements or other rights that could affect the acquisition.

Existing finance can create another hurdle. A company may have granted security over its assets to a lender, and registered charges may appear on its Companies House record. Those arrangements may need to be repaid, released or otherwise dealt with as part of the acquisition.

For businesses operating in certain sensitive sectors, government approval may also be relevant. Some acquisitions within the sectors covered by the National Security and Investment Act 2021 must be notified and cleared before they can complete.

None of these issues necessarily means the business cannot be acquired. However, finding out late in the process that someone needs to consent, an important asset is tied up or the ownership position is unclear can slow down a deal that otherwise looked straightforward.

What Happens When A Buyer Finds A Red Flag?

A legal red flag does not automatically kill an acquisition.

Some issues can be fixed before completion. A missing agreement might be documented properly, ownership of an important asset could be clarified or an outstanding compliance issue may be resolved.

Other problems can affect the deal itself. A buyer might negotiate a lower price, ask for stronger warranties or indemnities, make completion conditional on an issue being fixed or require the seller to remain responsible for a particular risk.

Where the problem is significant enough, the buyer may decide the acquisition is no longer worth it.

This is why it helps to find these issues before the buyer does. Your business does not need to be legally perfect, but understanding its weak spots gives you more time to fix what you can and explain what you cannot.

If an acquisition could be on the cards now or further down the line, a Legal Health Check can help identify gaps in your contracts, ownership arrangements, compliance position and wider legal setup before due diligence begins.

If you would like a consultation on getting your business acquisition ready, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.