Toby Usher, Head of Legal (M&A)
Preparing for legal due diligence starts long before a buyer sends their first request. It means getting your corporate records, commercial contracts, employment paperwork, and IP ownership organised and accurate before anyone asks to see them. Founders who do this well move through the process faster, with fewer surprises, and with more control over how their business is presented to a buyer.
What is legal due diligence, and why does it matter?
Legal due diligence is the process a buyer’s legal team runs to check three things: that the buyer is acquiring exactly what they think they’re acquiring, that any risks, liabilities or compliance gaps are identified and resolved before completion, and that the buyer has the information it needs to run and integrate the business afterwards. It sits within the broader due diligence process, alongside the financial, tech and operational reviews.
What information will a buyer’s legal team ask for?
At the start of the process, a buyer sends an information request list. It can look long, but it almost always cover the following categories:
- Corporate records: statutory books, board minutes, shareholder documents
- Commercial contracts: standard terms, plus agreements with significant customers and suppliers
- Employment contracts: anonymised staff data, a standard contract template, and individual contracts for the senior team
- Intellectual property: registered and unregistered IP, key licences, and an account of how the software was developed and by whom
- Litigation records: details of any past or ongoing disputes
- Property records: lease or ownership documents for any premises
What happens once your documents are in the data room?
The buyer’s team typically spends three to four weeks reviewing the information uploaded to the data room. That review will typically focus on three things: ownership (confirming the sellers actually own the shares, assets and IP being sold), contracts and compliance (understanding what is in place and what needs to change after completion), and risk (surfacing anything that needs fixing or mitigating in the transaction documents).
“We’re not expecting everything to be squeaky clean. We’re expecting to find things that need fixing, and the process of fixing them is a collaborative one.”
Toby Usher, Head of Legal (M&A), ClearCourse
What causes delays in legal due diligence?
Four things account for almost every delay:
- Poor record keeping: statutory books not maintained, informal or non-existent customer contracts, and IP developed by third parties without a formal assignment
- The pace of information: founders are running a business at the same time as selling it, and gathering documents takes longer than expected
- Data room organisation: a well-structured data room speeds up the review significantly; documents dropped into a single folder without structure slows it down
- Third parties: landlords and banks are a regular source of delay, so change of control conversations with key suppliers, customers or lenders should start as early as possible
None of these are typically deal-breakers. They just need to be resolved, and that takes time you can save by starting early.
Four myths founders believe about legal due diligence
Myth: “Companies House is our official record, so that’s enough.”
Fact: it isn’t. Your statutory books, particularly the register of members, are the legally definitive record. Many founders haven’t maintained these separately from Companies House and need to reconstruct them.
Myth: “We don’t have formal contracts, but it’s fine as our customer relationships are solid.”
Fact: good relationships aren’t enforceable. If a major customer makes up a significant share of revenue and there’s no binding agreement, a buyer has no certainty that revenue continues after the sale.
Myth: “If we disclose a problem, the buyer will walk away.”
Fact: in almost every case, they won’t. Problems surface eventually, and one raised late causes far more disruption than one raised early. Being upfront builds trust and keeps the process moving.
Myth: “Our developer built the software, so the IP is obviously ours.”
Fact: not automatically. If a contractor contributed without a contract that explicitly assigns the IP to your company, ownership is unclear. It’s usually fixable, but it needs addressing before completion.
How to prepare for legal due diligence
The most useful thing you can do, well before a sale is on the table, is get your records in order:
- Make sure your statutory books, including the register of members, are current and match Companies House
- Put binding written agreements in place with your significant customers and suppliers, not just informal understandings
- Confirm current employment contracts are in place for your entire team
- Establish who contributed to your software and whether IP ownership is documented and assigned to the company
- Gather lease or ownership documents for any premises, and flag any past or ongoing disputes early
- Start change of control conversations with key suppliers, customers, landlords or lenders as early as possible
You don’t need to be perfect. The more groundwork you’ve done, the faster and smoother the process will be, and the more control you keep over how your business is presented.
Frequently asked questions
What is legal due diligence in an M&A deal?
Legal due diligence is the review a buyer’s legal team carries out to confirm ownership of the business, identify risks or compliance gaps, and gather the information needed to run and integrate the business after completion.
How long does legal due diligence take?
It typically takes three to four weeks once documents are in the data room, though the overall timeline depends on how organised your records are, the size of your company, and how quickly third parties like banks and landlords respond.
What documents do I need for legal due diligence?
Buyers typically ask for corporate records, commercial contracts, employment contracts, intellectual property documentation, litigation records and property records.
Does disclosing a problem during due diligence kill the deal?
Rarely. Problems surface eventually, and raising them early is far less disruptive than a buyer discovering them late. Most issues are resolved collaboratively rather than causing a deal to fall through.
Who owns IP built by a contractor?
Ownership isn’t automatic. If a contractor built part of your software without a contract that explicitly assigns the IP to your company, ownership is unclear and needs to be resolved before completion.
If you’re ready to start conversations about finding your business a new home, get in touch with our M&A team for more information.
