When a buyer values a SaaS business, they are paying for predictable recurring revenue and software they can own, sell and build on. Due diligence is how they test both. Every gap they find in your contracts, code ownership or compliance becomes a reason to lower the price, hold back part of it, or ask for wider warranties and indemnities.
Most of these issues are fixable, but only if you find them before the buyer does. This guide covers the legal problems that come up most often when selling a SaaS business, and what to do about them in the months before a sale.
Why Legal Issues Hit SaaS Valuations So Hard
SaaS businesses are usually valued as a multiple of recurring revenue. That makes the legal foundations of that revenue critical. A buyer will ask three questions:
- Does the company really own its product? If the code or brand isn’t owned outright, the buyer may not be able to exploit it.
- Is the revenue secure? If customers can walk away on a change of control, or contracts are loose, the recurring revenue is less certain than the numbers suggest.
- Are there hidden liabilities? Data protection breaches, non-compliant subscription terms or employment disputes can all land on the buyer after completion.
An issue that looks minor in day-to-day trading can have an outsized effect on price. Buyers apply the same valuation multiple to the risk they see, so a problem affecting a slice of recurring revenue can move the headline price far more than the issue would cost to fix.
The Legal Issues Buyers Look For
1. Who actually owns the code?
This is the most common problem in SaaS deals. In the UK, copyright in work created by an employee in the course of employment generally belongs to the employer. Work created by founders before incorporation, freelancers, contractors and offshore development agencies does not automatically transfer to the company. Without a written IP assignment, the developer may still own what they wrote.
Buyers will ask for assignments covering everyone who has contributed to the product, including co-founders who have since left. Gaps here can delay or derail a deal, and fixing them after a contributor has left can be expensive or impossible.
2. Open source software
Almost every SaaS product uses open source code. Most licences are permissive, but some “copyleft” licences can require you to release your own source code if you combine or distribute it in certain ways. Network-focused licences such as the AGPL can be triggered simply by making software available over the internet.
Buyers increasingly run code scans. Keep a record of the open source components you use and their licences, and check any copyleft code before a buyer finds it.
3. Customer contracts
Buyers will review your customer terms to test how secure your recurring revenue is. Common issues include:
- change of control clauses that let customers terminate or renegotiate on a sale;
- key customers on unsigned, out-of-date or bespoke terms;
- uncapped liability, or liability caps lower than your insurance or the deal value would support;
- generous service credits or SLAs you don’t consistently meet; and
- short notice periods that let large customers leave easily.
If you sell into the EU, buyers will also check your terms against the EU Data Act. From 12 January 2027, cloud providers, including SaaS providers, can no longer charge EU customers switching or data egress fees.
4. Data protection
SaaS businesses process large amounts of personal data, often for their customers. Buyers will check your privacy notices, data processing agreements, international data transfers, security arrangements and breach history.
5. Subscription and consumer compliance
If any of your customers are consumers, your sign-up, renewal and cancellation flows will need to meet the new subscription rules that apply from 1 January 2027. Non-compliant subscriptions could expose the business to fines from the Competition and Markets Authority and refund claims, which buyers will price in.
6. People and equity
Buyers want the team that built the product to stay. They will look at employment contracts, restrictive covenants, key person dependency and how equity incentives are structured. A messy cap table, undocumented share promises or EMI options that don’t qualify can all complicate a sale. With the recent EMI changes, it is also worth checking whether your options are set up to reward the team properly on exit.
Getting Sale-Ready: A Pre-Sale Checklist
Ideally, start this work 6 to 12 months before you approach buyers. That gives you time to fix problems rather than explain them away.
- Obtain written IP assignments from every founder, employee, contractor and agency that has worked on the product.
- Check your trade marks and domain names are registered to the company, not to a founder.
- Audit your open source use and resolve any copyleft risks.
- Make sure every significant customer is on signed, current terms, and list any change of control clauses.
- Review your liability caps, SLAs and service credits against what you actually deliver.
- Check your supplier and hosting contracts can transfer to a buyer.
- Update your privacy notices, data processing agreements and international transfer arrangements, and record any data breaches.
- Bring consumer subscription flows into line with the 2027 rules.
- Tidy the cap table, and confirm EMI options and other share awards are properly documented.
- Put key staff on up-to-date contracts with suitable confidentiality and restrictive covenants.
- Set up an organised data room so documents are ready when due diligence starts.
A pre-sale legal review, sometimes called vendor due diligence, lets you see your business the way a buyer will. It also gives you more control over the narrative and can shorten the deal timetable.
What Due Diligence Findings Mean for the Deal
Issues a buyer finds rarely kill a deal outright, but they change its terms. Expect a buyer to respond by:
- reducing the price;
- holding back part of the price in escrow or deferring it;
- asking for specific indemnities, so you pay if a known risk materialises;
- extending warranties and the period in which they can claim; or
- making completion conditional on fixes, such as signed IP assignments.
Each of these shifts risk back to you as the seller. Fixing problems before a sale is almost always cheaper than negotiating around them during one.
Timing and Tax
Tax also affects what you take home. Business Asset Disposal Relief (BADR) can reduce the capital gains tax rate on the first £1 million of qualifying lifetime gains, but the rate rose to 18% on 6 April 2026. The Autumn Budget on 28 October 2026 may bring further changes to capital gains tax.
The structure of the deal matters too. Most sellers prefer a share sale, while buyers often prefer to buy assets. Take tax advice early, so the structure and timing work for you.
Talk to Our M&A and Technology Lawyers
JPP Law advises SaaS founders on selling a business, from pre-sale legal reviews and data room preparation through to negotiating the sale agreement. Our technology and SaaS lawyers can help you fix IP, customer contract and data protection issues before a buyer finds them.
Book a free introductory call to discuss your plans.
