What due diligence actually involves when a UK startup gets acquired

Due diligence is the investigation a buyer carries out into a target company’s legal, financial, commercial and operational position before an acquisition completes, covering everything from who actually owns the shares being sold to whether key customer contracts survive a change of ownership. It sits between agreeing heads of terms and signing the final sale and purchase agreement (SPA), and what it uncovers routinely changes the deal, not just whether it happens at all: a buyer who finds a problem during due diligence will typically renegotiate price, insist on specific contractual protections, or in some cases walk away entirely. For a founder preparing to sell, understanding what a buyer will actually look for, and getting the answers in order before it is asked for, is one of the most concrete things that can be done to keep a deal on track.

What is due diligence actually for?

Due diligence exists to let a buyer verify that the business is what it appears to be, and to surface anything that should change the price, the deal structure or the legal protections written into the SPA. The buyer typically sends a due diligence request list covering a wide range of documents and information, the seller responds, often through a secure online data room, and the buyer’s advisers review what comes back, ask follow-up questions, and use the findings both to validate the agreed price and to decide what specific warranties and indemnities it wants written into the final contract. Because the process is really about risk allocation as much as verification, what a buyer finds does not just get noted, it gets priced or contracted around.

What are the main categories a buyer investigates?

Most UK acquisitions cover a broadly consistent set of due diligence categories, though the depth in each varies with the size and nature of the deal.

Category	What it covers
Corporate and ownership	Shareholder identity, company governance records, and any third-party rights or restrictions affecting the sale
Financial and tax	Revenue quality, outstanding debts, tax compliance history, and any undisclosed liabilities
Key contracts	Whether major customer or supplier contracts survive a change of control, assignment restrictions, and personal guarantees
Employment and TUPE	Employment status of staff, written contracts, any disputes, and whether the Transfer of Undertakings (Protection of Employment) regulations apply
Intellectual property	Ownership of trade marks, domains, software and content, and whether IP created by founders or contractors was properly assigned to the company
Data protection	How customer data was collected, validity of consent, breach history, and UK GDPR compliance
Regulatory and compliance	Sector-specific permits, licensing and any relevant compliance standards

Why does corporate and ownership diligence matter so much?

A buyer needs absolute certainty about who legally owns the shares being sold and whether anyone else has a right that could block or complicate the sale, which is why this is usually the first thing checked. This typically means reviewing the company’s statutory registers, its Companies House filing history, and its articles of association for any pre-emption rights, drag-along or tag-along clauses, or other provisions that affect how a sale of shares can happen. Any gap between what the share register shows and what founders believe to be true, for example shares that were promised informally but never properly issued and recorded, needs resolving before completion, since it directly affects who is legally entitled to receive sale proceeds.

Why do IP and data protection checks so often turn up problems?

Buyers routinely find that IP created by an early contractor, freelancer or co-founder who has since left was never formally assigned to the company, which leaves genuine doubt over whether the business actually owns core assets like its own product code. Because a startup’s value is frequently concentrated in intangible assets such as software, trade marks and proprietary data rather than physical property, an unresolved IP ownership gap is one of the more common reasons a deal gets delayed or repriced. Data protection review, checking how customer data was collected, whether consent was validly obtained, and whether there is a clean breach history, has become a similarly standard part of the process given how central customer data usually is to a modern software business’s value, and any material gap here forms part of what the seller has to promise is true (a warranty) in the final SPA.

What happens with employment and TUPE?

Where an acquisition is structured as a business and asset sale rather than a share sale, the Transfer of Undertakings (Protection of Employment) regulations, generally known as TUPE, can automatically transfer employees to the buyer on their existing terms, and a buyer needs to understand exactly which employees are covered, on what terms, and whether there are any live disputes before completion. Even in a share sale, where TUPE does not typically apply in the same way because the employing company itself simply changes ownership, a buyer will still want to see written contracts, confirm there are no undisclosed disputes, and check that employment status has been correctly classified, since misclassified contractors or missing written terms are a common and costly finding.

What are the most common red flags?

The findings that most often cause a buyer to slow down, renegotiate or walk away include missing or informal contracts that were never properly documented, revenue heavily concentrated in one or two customers, unclear or unassigned IP ownership, change-of-control clauses in key contracts that let a customer or supplier terminate on a sale, lease problems, and employment or tax irregularities. None of these automatically kills a deal on its own, but each one shifts risk onto the buyer unless it is addressed, whether through a price adjustment, a specific indemnity in the SPA, or fixing the underlying issue (such as properly assigning IP or regularising a contractor’s status) before completion.

How does due diligence connect to what gets filed at Companies House?

Due diligence itself is a private process between buyer and seller and generates no public filing, but its outcome, the completed acquisition, does trigger the usual statutory obligations once the deal closes: notifying Companies House of the change in ownership, typically through the company’s next confirmation statement, and, where new shares are issued as consideration, filing a return of allotment on form SH01 within one month of allotment, according to GOV.UK’s guidance on event-driven company filings. Getting the corporate and ownership diligence right upfront is partly what makes these post-completion filings straightforward rather than a scramble to reconcile what the share register actually says with what was agreed in the deal.

The practical takeaway

Due diligence is not a formality that happens after a deal is effectively agreed, it is the process that actually shapes the final price and the legal protections both sides end up with, so a founder who assembles a clean, organised data room well before a buyer asks for one is in a materially stronger negotiating position than one who is finding documents for the first time mid-process. The most valuable preparation a founder can do before starting a sale process is a light internal review of exactly the same categories a buyer will check, corporate records, IP assignments, key contracts, employment status and data protection compliance, so that anything that needs fixing gets fixed on the founder’s own timetable rather than the buyer’s.