Selling a Software Company: A Legal Guide for UK Founders and Shareholders

Selling a software company is a major event in a founder’s career—often the result of years of technical innovation, strategic growth, and relentless effort. Whether you’re exploring a full exit, planning for acquisition by a trade buyer, or attracting interest from private equity, the sale process requires rigorous legal preparation.

This guide outlines the most important legal, commercial and practical considerations when selling a UK-based software company, including how deals are typically structured, what buyers look for, and how to prepare for due diligence.

Structuring the Deal: Share Sale vs Asset Sale

One of the earliest decisions in a software company sale is how to structure the transaction. This has significant implications for tax, risk, and legal complexity.

Share Sale (Most Common)

In a share sale, the buyer acquires the issued shares of the company. This means the buyer takes ownership of all assets, liabilities, contracts, employees, and obligations.

Key points:

• Cleaner and simpler from the seller’s perspective.
• Retains continuity for employees and clients.
• Often preferable for tax purposes—shareholders may benefit from Business Asset Disposal Relief (BADR) (10% CGT on qualifying gains).
• Buyer assumes all known and unknown liabilities, prompting thorough due diligence.

Asset Sale

Here, only specific business assets (such as software IP, customer contracts, and goodwill) are transferred.

Key points:

• Buyer avoids unwanted liabilities or parts of the business.
• Each asset and contract must be individually transferred or novated.
• May trigger VAT and other tax consequences.
• Often used when the seller wants to retain other operations or where legal risk is high.

While share sales dominate in UK software company transactions, asset sales may still be considered for distressed companies or early-stage startups with limited contractual obligations.

Common Deal Features in Software Company Sales

UK software company deals—especially involving private equity or strategic acquirers—often share several structural features:

• Combination of cash and earn-out: A proportion of the price is deferred and contingent on performance milestones (e.g. revenue, EBITDA, customer growth).
• Warranties and indemnities: Buyers require extensive legal protections. Founders may be personally liable if warranties are breached.
• Escrow/holdbacks: Part of the purchase price may be held in escrow to cover future claims.
• Founder retention: Key individuals are often expected to stay on post-sale to ensure smooth transition and business continuity.
• Restrictive covenants: Sellers usually agree not to compete or solicit clients/employees for a fixed period.

Preparing for a Successful Exit

Early preparation can significantly improve valuation, reduce risk of delay or collapse, and improve negotiating leverage. Founders should proactively address the following areas:

Legal Housekeeping

• Ensure all company filings, cap tables, and statutory registers are up-to-date.
• Formalise shareholder and option holder arrangements.
• Review governance documents (e.g., articles of association, shareholder agreements).

Intellectual Property (IP) Ownership

• Verify that all software code, algorithms, brand assets, and proprietary tools are owned by the company.
• Ensure IP assignments are in place from all founders, employees, freelancers, and consultants.
• Review any use of open-source software for licence compliance.

Contractual Position

• Identify key revenue-generating contracts and review termination and change-of-control clauses.
• Prepare summaries of key client, supplier, and partner agreements.
• Assess whether any material contracts require third-party consent on sale.

Employment & Team

• Ensure employment contracts exist for all staff, including IP assignment clauses.
• Confirm compliance with IR35 and other employment tax obligations, particularly if contractors are involved.
• Review share option schemes—ensure documentation is complete and reflects latest valuations.

Tax and Financial Structuring

• Explore availability of tax reliefs (e.g. BADR).
• Prepare audited or reviewed financials and clean management accounts.
• Demonstrate SaaS metrics (e.g. Monthly Recurring Revenue, churn, LTV/CAC).

Buyer Due Diligence: What Will Be Scrutinised?

Buyers will undertake a detailed due diligence process across multiple areas. Software companies are subject to particularly focused scrutiny in:

Intellectual Property and Technology

• Clear legal ownership of all IP assets.
• Freedom to operate (no third-party infringement risk).
• Use and management of open-source components.
• Documentation and transferability of code, infrastructure, and licences.

Data Protection Compliance

• Adherence to GDPR and PECR requirements.
• Privacy policies, cookie usage, data subject rights handling.
• Contracts with data processors (e.g. AWS, Stripe, CRM platforms).

Key Contracts

• Change of control clauses that may trigger termination or renegotiation.
• Revenue concentration risk (e.g. dependency on a small number of clients).
• Licence terms (exclusive, perpetual, revocable?) and territory limitations.

Employment and Incentives

• IR35 compliance for developers and contractors.
• Accuracy of option scheme documentation and vesting provisions.
• Absence of employment disputes or tribunal exposure.

Financial Performance

• Verification of MRR/ARR, renewal rates, churn, and growth KPIs.
• Deferred revenue accounting and recognition policies.
• Cost structure, burn rate, and margin performance.

Litigation and Regulatory Risk

• Existing or threatened legal claims.
• Past breaches of employment, regulatory, or IP laws.
• Ongoing compliance with FCA, Ofcom, or other industry-specific regulators.

Proactively assembling a vendor due diligence pack can accelerate the deal and demonstrate professionalism.

Legal Documents in the Transaction

Several key legal documents will be negotiated and executed as part of the sale process:

Heads of Terms (LOI)

Outlines the key commercial terms—purchase price, structure, timelines, exclusivity, and confidentiality. Usually non-binding but sets the framework for the deal.

Share Purchase Agreement (SPA)

The main agreement containing:

• Payment structure (cash, shares, earn-out, escrow).
• Warranties and indemnities.
• Limitations on liability (time, amount, knowledge qualifiers).
• Restrictive covenants.

Disclosure Letter

A detailed document where the seller qualifies warranties with specific disclosures. Helps limit exposure to future claims.

Employment Agreements and Incentive Plans

If founders or key staff are retained, new contracts or consultancy agreements may be required, alongside post-sale share option schemes.

Board and Shareholder Resolutions

Required to approve the transaction, authorise share transfers, and make Companies House filings.

Post-Completion Considerations

Even after the deal closes, sellers may have ongoing responsibilities:

• Earn-out administration: Performance tracking, reporting obligations, and dispute resolution mechanisms.
• Transition support: Access to systems, handover to new management, client introductions.
• Tax filings: Proper capital gains tax reporting, Entrepreneurs’ Relief claims, and clearance applications.

Buyers may also request that sellers remain accessible during a transition period to ensure continuity.

Common Pitfalls to Avoid

Founders can reduce execution risk by steering clear of these common issues:

• Unresolved IP ownership—especially from third-party contractors or ex-cofounders.
• Incomplete option scheme records or undocumented equity issuances.
• Aggressive warranty package with unlimited or poorly defined liability.
• Failure to prepare for due diligence, causing delays or loss of buyer confidence.
• Not securing key staff post-sale, risking business continuity.

Conclusion: Plan Early, Exit Smart

Selling a software company is both a legal and commercial challenge. A successful outcome depends on early preparation, robust documentation, and clear alignment between founders, investors, and legal advisers.

Whether you’re exploring exit options or responding to a serious approach, it’s essential to work with lawyers experienced in UK software M&A, who understand the nuances of IP, SaaS business models, and private equity structures.

At Jonathan Lea Network our Corporate team has advised on numerous software company exits, from VC-backed scale-ups to strategic acquisitions and trade sales. We help founders navigate the complexity of due diligence, negotiate favourable terms, and protect value throughout the transaction lifecycle.

Call us on +44 (0)1444 708 640, email us on wewillhelp@jonathanlea.net or contact us for a confidential, no-obligation consultation.

 

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.