Customer disputes and claims 

IT services businesses live at the intersection of complex technology and demanding customers. Things go wrong. Systems fail. Projects overrun. Most of the time these issues get resolved through service credits, remediation work, or commercial negotiation. But sometimes they escalate. 

Failed implementations or migrations where customers claim business disruption and financial losses. Security incidents where clients claim inadequate protection. Billing disputes where customers refuse payment and threaten legal action. SLA breaches where customers seek financial penalties. IP or confidentiality disputes where customers allege misuse of their data. 

Buyers discover these through reviews of customer correspondence files, analysis of aged debtor disputes, customer reference calls, contract reviews identifying penalty clauses, and legal diligence uncovering demand letters. 

Even if the seller believes a claim is entirely meritless, the buyer sees risk. Legal defence costs money. Settlement costs more. And the broader credibility signal one dispute sends about the business often matters more than the specific financial exposure. 

We worked on a transaction where an MSP had a £180,000 invoice in dispute with a customer who claimed services weren’t delivered as specified. The buyer insisted on a £180,000 escrow holdback plus full indemnity. Their reasoning: “We’re not just worried about the £180,000. We’re worried that this indicates poor project management or documentation practices. What other customers might have similar disputes we haven’t found yet?” 

Employment and HR liabilities 

People issues create significant hidden liabilities that founders typically don’t think to flag to buyers. 

Unfair dismissal or discrimination claims from former employees, even unsubstantiated ones, cost £15,000 to £40,000 in legal fees to defend. Unpaid wages or holiday pay claims can go back several years. IR35 contractor misclassification is a major risk: if individuals treated as contractors should have been classified as employees for tax purposes, retrospective tax, penalties, and interest can run to hundreds of thousands of pounds. Pension auto-enrolment failures result in compliance action from The Pensions Regulator including fines and backdated contributions. 

A telecommunications business we advised had classified 12 field engineers as contractors for four years. Diligence concluded they should have been employees under IR35 rules. Retrospective tax liability: approximately £320,000 plus penalties and interest. The buyer required a full indemnity, £400,000 in escrow for three years, and immediate reclassification of all contractors to employee status post-completion. 

The seller had relied on his accountant’s advice that contractor status was appropriate. But reliance on professional advice does not eliminate the liability if HMRC disagrees. 

Tax exposures and uncertain positions 

Tax systems are complex, and IT services businesses often take positions that seem reasonable but carry challenge risk. 

R&D tax credit claims are particularly common. Many IT businesses claim credits for development work. If HMRC challenges that the work doesn’t qualify, the credits must be repaid with interest. An MSP we reviewed had claimed £280,000 in R&D tax credits over three years for development of customer portals and automation tools. The buyer’s tax advisers concluded that most of this was routine software development, not qualifying R&D under HMRC guidelines. Potential exposure: £280,000 repayment plus £60,000 to £80,000 in penalties. The buyer demanded a tax deed of indemnity and £350,000 in escrow. 

VAT treatment questions, aggressive positions on allowable business expenses, employment taxes beyond IR35, and transfer pricing for businesses with related entities or offshore arrangements all carry similar risk profiles. 

Beyond the challenge risk on specific positions, there is a separate cash flow dimension to tax that is worth understanding. Corporation tax is not paid at the point it is recognised in the P&L. For most companies, tax is paid in the year following the accounting period to which it relates, through a combination of a payment on account and a balancing payment. For larger companies, quarterly instalment payments apply. This timing difference means that a business that has grown its profits significantly in the most recent year may have a tax liability building that has not yet been paid and does not obviously appear in the management accounts. Buyers will identify this and treat it as a debt-like item in the net debt schedule: cash that belongs to HMRC rather than to the seller. 

The practical point for sellers is to understand their current tax position clearly before going to market: what is the estimated liability for the most recent period, what payments on account have already been made, and what balance will be due at or after completion. Surprises in the tax cash position, discovered during diligence, create exactly the kind of trust erosion that makes buyers question everything else. 

Regulatory and compliance gaps 

IT services businesses operate in increasingly regulated environments, and compliance gaps are surprisingly common. 

GDPR and data protection failures create ICO fine exposure of up to £17.5 million or 4% of global turnover. Sector-specific regulations apply to businesses serving financial services clients under FCA requirements or healthcare under NHS data security standards. 

Information security certifications are a particular area of risk. A cybersecurity services business claimed ISO 27001 certification in its marketing materials and customer contracts. Diligence revealed the certification had lapsed 14 months earlier. Three major customers had contracts requiring valid ISO 27001 as a condition of ongoing service provision. The lapsed certification was a technical breach giving those customers termination rights. Potential exposure: loss of £680,000 annual revenue if customers exercised those rights, plus claims for misrepresentation. The buyer required immediate recertification before completion at a cost of £45,000, plus written confirmation from the three customers of continued engagement, plus full warranty coverage for any claims arising from the lapsed certification. 

Ofcom registrations for telecommunications providers, SIA licensing for security services, and Modern Slavery Act compliance statements all carry similar potential exposure when not properly maintained. 

Intellectual property risks 

IT services businesses often have complex IP situations that aren’t visible until someone looks carefully. 

Unclear ownership of developed IP is the most common issue. Software, tools, or methodologies developed by contractors may not be properly assigned to the company, particularly where contractors were engaged without formal IP assignment agreements. Third-party IP used without proper licensing, including open-source software with restrictive licence terms, creates related exposure. 

One managed services provider had built a customer portal using a popular open-source framework licensed under GPL, which requires any derivative works to also be open-sourced. The portal contained proprietary features the seller considered competitive advantages. Enforcing GPL would require making that code publicly available, destroying the competitive value. The buyer’s options were a complete rebuild at £200,000 over eight months, commercial licensing at £80,000 plus ongoing fees, or accepting GPL obligations and open-sourcing the code. There was no cheap resolution. 

Contractual commitments and onerous obligations 

Hidden within supplier contracts, customer agreements, and partnership arrangements are obligations that only become visible under careful diligence. 

Minimum purchase commitments with suppliers that aren’t being met. Exclusivity restrictions preventing the business from working with certain customers or offering competing services. Change-of-control provisions in supplier or partner contracts that terminate upon sale, requiring renegotiation. Price freezes in multi-year customer contracts locking in eroding margins. SLAs with heavy penalty clauses. 

A telecommunications reseller had a wholesale supply agreement requiring minimum annual purchases of £400,000. Current purchases were running at £280,000 annually, a £120,000 shortfall with associated penalties. The contract also had change-of-control provisions allowing the supplier to renegotiate terms or terminate once the sale became known. The buyer’s leverage with this supplier disappeared at the point of disclosure. 

Litigation and other legal disputes 

Beyond customer and employment disputes: landlord disputes about dilapidations, service charges, or lease terms; shareholder disputes with minority holders about exit terms or governance; supplier claims for unpaid invoices or breach of contract; and professional negligence claims where clients allege advice caused financial losses. 

Buyers conduct comprehensive legal diligence including litigation searches, review of correspondence files, and warranties requiring disclosure of all threatened or actual litigation. Undisclosed correspondence revealing past disputes, even those the seller considers resolved, is one of the most common triggers for material price adjustments or increased escrow requirements.