Selling a Software Company: Legal Essentials for UK Sellers
Selling a software company in the UK requires far more than just signing the papers. Whether you operate a SaaS, enterprise software, platform or embedded solution, the legal groundwork you lay can make or break your exit. In this post, we walk UK sellers through the essential legal issues – from structuring the deal, handling IP and data, managing contracts, through to tax, warranties and regulatory traps.
If you haven’t yet, read our blog titled “A Seller’s Guide to Heads of Terms in Software M&A”. This article builds from that foundation and dives into what comes next.
- Choosing the Right Deal Structure: Share Sale vs Asset Sale
Why it matters (and often defaults to share sales)
Most software company sales proceed by way of a share sale, because it is cleaner for the seller. The buyer steps into the target entity with minimal disruption to existing contracts, employees and operational continuity. An asset sale, by contrast, may give a buyer more flexibility with unwanted liabilities but imposes extra friction on the seller with reassignments, consents, transfer of employees (TUPE) and potential tax/VAT consequences.
Key structure trade-offs:
| Issue | Share Sale | Asset Sale |
| Employee Transfer | No TUPE event (same entity continues) | Likely TUPE applies across the business transfer |
| Contracts & consents | Some change of control triggers | Require assignment or novation – more risky |
| Tax & VAT | Easier from seller side | Must check TOGC/VAT consequences |
| Buyer due diligence | Inherits whole company | May cherry-pick only parts wanted |
When choosing structure, also plan for tax implications such as Business Asset Disposal Relief and capital gains exposure.
- Lock Down IP & Software Ownership (Code, Open Source, Licences)
Why IP is the cornerstone
The value of a software company is often built almost entirely on its intellectual property – your codebase, architecture, APIs, integrations, trade secrets, domain names and more. Buyers will scrutinise the full chain of title, and any “loose strings” can become deal breakers.
Checklist for being ready for IP due diligence:
- Ensure all employee-developed software is contractually assigned to the company
- Identify and remedy any contractor work not already assigned
- Document any trademarks, domain registration, patents or design rights
- Prepare a source code escrow if required by the buyer
Open-source issues often provoke red flags during diligence and adhering to recognised frameworks (e.g. OpenChain, ISO 5230) shows maturity in open-source software compliance.
- Data Protection & Privacy in the Exit Process
Why data is high-stakes
Many software deals are underpinned by customer or user data. In the UK, GDPR does not prevent a sale, but it imposes strict obligations in how you share data during diligence, how you effect the transfer of data controllers and how you inform individuals post-sale.
Best practices for sellers:
- Prepare a data sharing agreement or protocol to govern buyer access to personal data pre-completion
- Confirm the lawful basis for data processing and transfer (e.g. consent, legitimate interests)
- Map out how controller duties will shift post-completion (especially in an asset sale)
- Conduct or update Data Protection Impact Assessments where needed
- Keep an audit trail of data access, transfer and security controls
Buyers will expect you to hand over your Records of Processing Activities, security and breach logs, third-party data security arrangements and notices to users for the change in processing.
- Contractual Risk: Change of Control, Consents, Assignment & Novation
The buyer’s appetite will depend heavily on your commercial contract book – customer contracts, reseller agreements, licences, supplier agreements, SaaS cloud contracts, marketplace arrangements etc.
Key challenges to map early:
- Change of Control Clauses (in a Share Sale): Many contracts allow counterparties to terminate or renegotiate if control changes. Flag all such clauses and prepare consent strategies (which is often a slow process).
- Assignment vs Novation (in Asset Sale): Typically, rights may be assignable, but obligations often require novation (a three-party agreement). Track which contracts need what.
- Non-assignable licences or third parties: Some software or vendor licences expressly prohibit assignment or require consent; cloud / marketplace platforms may enforce anti-transfer clauses.
- Public sector / framework contracts: Government / NHS / regulated-industry clients may have stricter rules around transfers and require waivers or approvals.
A careful consent management plan (with deadlines, fallback positions and notification templates) will greatly reduce last-minute surprises.
- Human Capital & Employee Matters: TUPE, Share Options & Retention
People are central to software value, so getting the employment side right is non-negotiable.
Key issues:
- TUPE: In an asset sale, transferring the business in continuity triggers TUPE (information, consultation, protection of existing terms). In a share sale, TUPE does not apply because the employer remains the same entity.
- Share options / EMI / tax reliefs: Review your option plan, particularly EMI schemes. Be careful of disqualifying events and timing rules which can affect Business Asset Disposal Relief eligibility for option holders.
- Price Mechanisms, Risk Allocation & Deal Waterfalls
Getting paid is as important as the headline valuation.
Common deal structures:
- Locked-box vs Completion Accounts
- Locked-box fixes the price at a prior date and relies on leakage protection
- Completion accounts adjust the price post-closing for cash, debt, working capital
- Sellers often prefer locked-box for certainty, but buyers may insist on completion accounts in volatile businesses.
- Earn-outs / deferred consideration: Useful in bridging valuation gaps in SaaS deals, but complex in practice. You’ll need to nail down metrics, governance, audit rights, accounting policy alignment and exit scenarios.
- Warranty & Indemnity insurance: Increasingly used in UK mid-market tech deals and can protect seller exposure to potential unintended breaches of warranties and indemnities. Although please note insurers exclude known issues and demand deep due diligence.
- Caps, baskets, thresholds and survival periods: Negotiate seller-friendly limits to liability such as knowledge qualifiers, materiality thresholds and defined baskets.
- Regulatory Barriers: Merger Control & National Security Screening
Even if your business isn’t huge, deals in sectors such as AI, advanced computing, defence, quantum or semiconductors may require mandatory notification under the National Security & Investment Act 2021. Even non-notifiable deals may be “called in” by the government
Engage professionals early during due diligence to spot any red flags.
- Tax Deep Dive for Sellers
Beyond Business Asset Disposal Relief, several tax issues deserve attention:
- Substantial Shareholding Exemption: If a corporate seller holds shares in a trading company, SSE may allow exemption from corporation tax on gains, subject to conditions and reorganisations pre-sale.
- Stamp Duty: Share transfers attract 0.5% stamp duty on the consideration paid.
- VAT / TOGC in asset sales: If the transaction qualifies as a Transfer of a Going Concern, it may be outside the scope of VAT. Conditions must be met strictly (ongoing business, same kind, no trading break).
- Option / EMI timing traps: Disqualifying events or poor timing can lead to associated tax reliefs for option holders being withdrawn.
- Preparing the Seller’s Diligence Bundle
A strong data room de-risks the buyer’s process and speeds negotiation. Typical folders and documents include:
- IP & Technology: assignments, contractor agreements, details of registered IP.
- Data & Privacy: security logs, data-sharing protocol, notices.
- Commercial Contracts: contract register with consents and change-of-control flags, renewal timeline.
- People & Employment: staff list, option register, HR policies.
- Finance & Metrics: historic accounts, debt schedule, KPIs, working capital mechanics.
- Legal & Corporate: constitutional documents, board minutes, any historic litigation, material correspondence.
- Clean, searchable, well-indexed folders reduce friction, build buyer confidence and limit surprises.
Conclusion
Selling a software company is a high-stakes journey, especially in the UK’s complex legal, tax and regulatory landscape. If you get the deal structure, IP, contracts, data and SPA positions right, you dramatically increase your odds of achieving a clean, high-net exit.
If you’d like help turning this into a client-ready exit plan, or want a bespoke review of your deal structure or draft SPA, contact the Jonathan Lea Network today for specialist advice.
Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.
Frequently Asked Questions:
This is a frequent diligence red flag. If you don’t have written IP assignments from those developers, the buyer may assume you don’t fully own the product and that can kill the deal. Before going to market make sure you audit your Git history, contractor agreements and any outsourced work. If you find gaps, get retrospective assignments signed and executed where necessary. Yes. Buyers will scan for copyleft licences (like GPL) and unpatched vulnerabilities. If your code links to GPL code in a way that creates derivative works, you could face obligations to open-source your proprietary product which is a massive risk. Best practice is to confirm licence types and remediate or replace risky components before diligence begins. Earn-outs often tie to revenue or ARR over 12–36 months, but the devil is in the drafting. Common pitfalls include: We negotiate “conduct covenants” into earn-out clauses to stop buyers from manipulating results which is an essential protection for sellers. It can. Many platform distribution agreements prohibit transfer without the platform’s consent or require you to reapply under the buyer’s entity. Some even reset revenue share terms. Occasionally, it’s strategically better to complete the sale and re-onboard post-completion rather than trying to transfer mid-deal. Yes – many acquirers prefer founders to stay for 12–24 months, especially in SaaS businesses. There are three common ways this happens: Negotiate your role early. If you want a clean exit, structure the deal accordingly.
VAT is charged at 20%.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.
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