The Legal Traps That Derail M&A – and How to Avoid Them

By Lora Witt

Mergers and acquisitions are meant to be the grand finale of ambition. Years of work, risk and persistence crystallise into value. Yet, when the paperwork thickens and the champagne stays corked, it’s often because of one thing: legal traps that weren’t spotted soon enough.

In the world of the company sale UK, the law is both the deal’s protector and its saboteur. The contracts that secure a fair exit can just as easily become the noose that tightens if you’ve missed a clause, misread a liability, or relied on an assurance that never should have been trusted.

The Mirage of a Clean Business

On paper, most businesses look solid. Profitable. Debt-free. Organised. But the deeper you go, the more you realise how many companies carry hidden obligations beneath that glossy surface. We’ve seen balance sheets where “other creditors” conceal director loans, where unpaid VAT lurks like a trapdoor, and where a supposed “accrual” is actually a six-figure payout to a supplier in dispute.

These aren’t rare. They’re routine. And they can unravel a deal.

Undisclosed liabilities are the quiet killers of transactions. They’re often invisible until after completion, when the buyer finds that the “debt-free” company they acquired is actually knee-deep in HMRC arrears, lease guarantees, or old HR grievances waiting to mature into tribunal claims.

In M&A, ignorance isn’t bliss—it’s expensive.

Warranties That Don’t Protect

When a buyer signs a Sale and Purchase Agreement, the warranties should feel like a safety net. They’re the seller’s promises that everything about the business is as described. But if those warranties are poorly drafted, that net might as well be made of paper.

We’ve reviewed agreements where “to the best of the seller’s knowledge” appeared so often it effectively nullified accountability. Others limited warranty claims to a single financial year—barely enough time for hidden issues to emerge.

A well-structured warranty schedule is not a legal technicality; it’s a financial instrument. It dictates who pays when something goes wrong. When it’s weak, the buyer pays every time.

Indemnities: The Forgotten Armour

If warranties are the net, indemnities are the armour. They’re supposed to provide pound-for-pound compensation for specific risks—tax investigations, TUPE claims, environmental issues. Yet, too many deals skate past this protection, trusting goodwill instead of drafting.

Without indemnities, a buyer can inherit a decade of unresolved tax exposure and have no contractual recourse. And in small or mid-market acquisitions—where the seller often stays involved post-sale—the chance of discovering legacy liabilities isn’t theoretical. It’s inevitable.

The Myth of “Saving on Due Diligence”

In many smaller deals, there’s an almost superstitious desire to keep legal costs low. “Let’s not over-lawyer it,” people say. Yet those who “save” on diligence often end up funding years of legal disputes that dwarf the fee they avoided.

Proper due diligence isn’t about paperwork; it’s about peace of mind. It’s the only moment in a company sale UK when you can still walk away. Once you’ve signed, the problems are yours forever.

A good diligence process interrogates the numbers: supplier dependencies, client contracts, litigation history, off-balance-sheet loans, related-party transactions. It asks awkward questions and doesn’t move forward until the answers make sense.

In our experience, every hour spent on diligence saves weeks of post-completion crisis management.

Employment and TUPE: The Inherited Liabilities

Then there’s the human side—the employees. TUPE, the Transfer of Undertakings (Protection of Employment) Regulations, ensures that when a business changes hands, its people and their rights transfer too. In theory, it’s simple fairness. In practice, it’s a legal minefield.

Many buyers discover too late that they’ve inherited grievances, disciplinary issues, and redundancy obligations. Others find themselves hit with claims for failure to consult under TUPE—claims that can reach into the tens of thousands.

Employment law doesn’t forgive oversight. And in the context of a business valuation UK, a mishandled TUPE process can turn a profitable acquisition into a liability overnight.

Regulatory Shadows

Every sector has its watchdogs: the FCA, the ICO, the Care Quality Commission, HMRC. And each of them can derail a transaction. A single lapse in regulatory compliance—say, a missing FCA permission or a GDPR breach—can freeze integration plans, attract fines, or void contracts.

Buyers sometimes assume these issues can be “tidied up later.” They can’t. Regulators don’t pause enforcement because ownership changed. The liability travels with the business.

The Illusion of Ownership

Few things shock buyers more than discovering they don’t fully own what they thought they bought. Defective share registers, missing stock transfer forms, and unregistered allotments are surprisingly common. They create a legal limbo where the buyer’s ownership can be contested years after the sale.

Even intellectual property, the crown jewel of many modern companies, often isn’t owned by the company itself. Contractors design logos, developers write code, and marketers create campaigns—but if their contracts don’t contain proper assignment clauses, that IP legally belongs to them, not you.

It’s the corporate equivalent of buying a car and finding out someone else owns the keys.

Change-of-Control Clauses: The Silent Deal Killers

Another silent trap lies in the small print of supplier and customer contracts. Many contain change-of-control clauses—provisions that let the other party terminate the agreement if the company is sold.

Imagine buying a business because of a long-standing client contract, only to discover the sale itself triggers that client’s right to leave. It happens all the time, especially in IT, recruitment, and professional services sectors.

The Earn-Out Mirage

Earn-outs—where sellers receive part of the price later if the business hits agreed targets—sound like a win-win. The buyer pays for performance; the seller gets rewarded for future success. But in practice, earn-outs are the breeding ground of mistrust.

Unless defined with surgical precision, disputes erupt over what counts as “profit,” how costs are allocated, or who controls strategic decisions during the earn-out period. It’s not unusual for sellers to accuse buyers of “managing the numbers down” to avoid payment, or for buyers to find the seller chasing short-term revenue at the expense of long-term health.

A good earn-out works when both sides expect and plan for these tensions—not when they pretend they won’t happen.

Tax: The Hidden Hand That Reshapes Every Deal

Tax rarely kills a deal outright, but it quietly reshapes them all. Poor structuring can wipe out reliefs, double-tax distributions, or even trigger HMRC challenges.

Many sellers assume Entrepreneurs’ Relief (now Business Asset Disposal Relief) will apply automatically. It doesn’t. Others ignore stamp duty or VAT implications until it’s too late. And both sides forget to agree who bears tax for pre-completion periods.

A transaction that looks lucrative pre-tax can lose its shine fast when those errors surface.

The Domino Effect on Valuation

Every one of these traps eventually converges on the same question: what is the business really worth?

A business valuation UK is never just a formula. It’s a reflection of trust in the numbers. Hidden liabilities, weak contracts, regulatory exposure—all of these distort valuation. The EBITDA might look healthy, but if customer contracts can vanish after a change of control, or if IP ownership is uncertain, that multiple means nothing.

Sophisticated buyers discount heavily for legal uncertainty. And shrewd sellers who clean up their house first—resolving disputes, formalising contracts, documenting ownership—command higher prices and faster sales.

Why These Traps Persist

If the risks are so well known, why do they keep catching people out?

Because M&A moves fast. Emotions run high. Buyers get deal fever; sellers get defensive. Everyone assumes “it’ll be fine.” The lawyers get called too late, and the issues surface after completion when the tone has changed from partnership to litigation.

The most effective deals are those where legal, financial, and commercial teams work together from the start. Not as a formality, but as a strategy.

The Lexis Capital Approach

At Lexis Capital Group, we’ve built our entire model around avoiding these traps. We enter businesses that others might consider too complex—where shareholders are in dispute, or the paperwork is a decade out of date—and bring structure, discipline, and clarity.

Because we have in-house barristers, we don’t just react to problems; we anticipate them. Our legal team sits at the same table as our corporate finance advisers, ensuring that every valuation, every clause, and every projection is grounded in legal reality.

When we help a business prepare for sale, we don’t just polish the financials. We examine share registers, clean up director loans, verify ownership of intellectual property, and rewrite outdated contracts. That process doesn’t just protect against risk—it increases the business valuation UK, because buyers pay premiums for certainty.

When we act on the buy side, we’re forensic. We don’t just look at numbers; we interrogate them. We trace off-balance-sheet debt, analyse related-party transactions, and test every warranty until it holds under pressure.

Our philosophy is simple:

a good deal is one that stands up in court even if it never gets there.

A Deal Built to Last

The truth is, every acquisition has ghosts. Some are financial; others are legal. What separates a good transaction from a disastrous one is how early those ghosts are identified—and who’s in the room when they are.

In a company sale UK, your documents are your defences. Your legal structure is your strategy. And your advisers are your insurance policy against the kind of mistakes that can erase value faster than any market shift.

At Lexis Capital, we merge legal precision with commercial realism. Our in-house barristers ensure every clause, every signature, every calculation is defensible. Our investment team ensures every deal still makes sense commercially after the lawyers have finished.

That’s how you keep both the price and the peace.

If you’re planning a sale, acquisition, or valuation and want to make sure your deal isn’t built on hidden traps, talk to us. Lexis Capital Group—where the law, the numbers, and the strategy finally work together.