Deal Killer #4: The “Skeleton in the Closet” That Halts Due Diligence
There is a moment in every business sale that strikes fear into the heart of the seller. It’s not the negotiation of the price, and it’s not the meeting with the bank.
It’s the arrival of the Legal Questionnaire.
This is usually a 50+ page document from the buyer’s solicitors asking for proof of everything. Every contract, every lease, every dispute, and every employee agreement from the last decade.
For many business owners, this is the moment they realize that while they have built a great commercial engine, their administrative engine has been running on fumes.
Welcome to Deal Killer #4: Legal Landmines.
These aren’t usually major lawsuits or crimes. They are the small, boring pieces of paperwork you forgot to sign in 2018. But to a buyer’s lawyer, they look like expensive risks.
The “Lazy Admin” Trap
When you are growing a business, paperwork is rarely the priority. You shake hands on deals. You download employment contract templates from the internet. You let the office lease roll over without signing a new one.
This “commercial pragmatism” works fine—until you try to sell.
A buyer is acquiring your legal entity. If that entity has holes in its paperwork, the buyer inherits those holes. And lawyers are paid to find holes.
The 3 Most Common Landmines
Here are the three specific issues we see stopping deals in their tracks:
- The Employee Contract Mess
Do all your staff have signed, up-to-date contracts? You’d be surprised how many don’t.
We often see senior managers on contracts from ten years ago when they were juniors. Or worse, staff working with no signed contract at all.
The Risk: If a buyer wants to restructure post-sale, they need to know the redundancy terms. If the paperwork is missing, the risk is unquantifiable.
- The “Change of Control” Clause
This is a silent killer. You might have a solid 3-year contract with your biggest customer. But buried in the Terms & Conditions is a sentence that says:
“The Customer may terminate this agreement immediately if the Supplier undergoes a Change of Control.”
The Risk: As soon as you sell the shares, that customer can walk away penalty-free. The buyer will demand you get “consent” from the customer before the deal closes—which tips off your customer that you are selling (something you might not want to do yet).
- Who Owns Your Logo? (IP Issues)
Did you pay a freelancer or a university student to design your logo or write your software code back in the early days?
Unless they signed a specific “Assignment of Intellectual Property” document, they still own that copyright, not your company.
The Risk: You are selling a brand you don’t legally own. A buyer’s solicitor will demand you go back to that freelancer (who you haven’t seen in 5 years) to get a signature. It causes delays and panic.
The Cost of Chaos: Indemnities
If your legal house isn’t in order, the deal might still go through, but it will cost you.
The buyer’s solicitor will demand Indemnities. These are legal promises where you agree to personally reimburse the buyer if any of these “skeletons” come to life after the sale.
Instead of a clean break, you remain on the hook for years, worrying that an old paperwork error will trigger a clawback of your sale proceeds.
The Dexterity Fix: Vendor Due Diligence
The only way to survive the legal audit is to do it yourself first.
At Dexterity Partners, we work with specialist legal partners 3volution to conduct Vendor Due Diligence. This is essentially a “mock audit” we run before we even talk to buyers.
We find the missing contracts.
We review the lease break clauses.
We check the IP ownership.
If we find a problem, we fix it quietly and cheaply. We sign the missing documents now, so by the time the buyer sees them, the ink is dry and the risk is gone.
Summary
Boring paperwork equals an exciting exit check.
If your filing cabinet (or Google Drive) is a graveyard of unsigned documents and handshake agreements, you are sitting on a minefield. Clearing it now is the cheapest investment you will ever make.
Next Step: Dig out your office lease and your top client contract. Are they signed? Is the date current? If not, it’s time to get Fit to Sell.
FAQ’s
1. What legal issues can stop a business sale during due diligence?
Legal issues that stop a business sale during legal due diligence are usually small but critical paperwork gaps. Missing contracts, outdated agreements, unclear intellectual property ownership, and lease issues all create M&A risk that can delay, reduce, or completely derail a transaction.
2. Why do buyers care so much about legal paperwork in M&A?
In M&A due diligence, buyers are acquiring the legal entity itself, not just the revenue. Any missing or defective paperwork represents ongoing legal risk that the buyer inherits after completion. When selling a business, uncertainty in legal compliance directly impacts deal certainty and valuation.
3. What are the most common legal deal killers when selling a business?
The most common legal deal killers in business sale due diligence include unsigned or outdated employee contracts, customer agreements with change-of-control clauses, and unclear intellectual property ownership. These issues frequently halt M&A transactions at an advanced stage.
4. How do employee contracts affect business sale risk?
Missing or outdated employee contracts increase employment law risk when selling a company. Buyers need certainty around notice periods, restrictive covenants, and redundancy liabilities. Without signed, current agreements, these risks become unquantifiable and reduce buyer confidence.
5. What is a change of control clause and why is it dangerous?
A change of control clause allows a customer to terminate their customer contract if the business is sold. This creates significant M&A risk, as key revenue can legally disappear the moment the transaction completes, forcing buyers to renegotiate price or require pre-sale client consent.
6. How do intellectual property issues delay business sales?
Unclear intellectual property ownership is a major issue in IP due diligence. If logos, software, or branding were created by freelancers without proper IP assignment, the company may not legally own its assets. This uncertainty directly impacts business valuation and deal timing.
7. What are indemnities and why do buyers demand them?
Indemnities in M&A are legal promises requiring sellers to compensate buyers if undisclosed problems arise post-sale. Buyers demand indemnities to protect themselves from unresolved business sale risk, especially when legal warranties cannot fully cover historic compliance gaps.
8. What is vendor due diligence and why is it important?
Vendor due diligence is a form of pre-sale due diligence conducted before buyers are engaged. When selling a business, it allows owners to identify and fix legal issues early, reducing negotiation friction and preventing last-minute deal delays or price reductions.
9. How can legal preparation increase business sale value?
Proper legal preparation helps prepare a business for sale by eliminating uncertainty uncovered in legal due diligence. Buyers pay higher M&A valuation multiples for businesses with clean, well-documented legal structures because the risk profile is significantly lower.
10. How can a corporate finance advisor help manage legal risks in a sale?
A corporate finance advisor coordinates M&A advisory services by working alongside specialist lawyers to run vendor due diligence, resolve legal gaps, and manage buyer scrutiny. This proactive approach streamlines the business sale process and protects both valuation and deal certainty.
