The Legal Health Check Every SME Should Carry Out Before a Problem Arrives

Most SME owners are very good at running their businesses. Few have the time to think about every legal risk sitting underneath them.

That is understandable.

A business owner is usually thinking about customers, sales, staff, suppliers, cash flow and growth.

Legal issues often move down the list — until something goes wrong.

A contract is disputed.A key employee leaves.A customer refuses to pay.A supplier fails to deliver.A shareholder wants to exit.A business is sold.Or a company discovers that an important agreement was never properly documented.

The good news is that many of these problems can be identified before they become expensive.

Think of it as a legal MOT

An SME does not need to wait for a crisis before speaking to its solicitor.

A periodic legal health check can examine the areas where the business is most exposed.

1. Your customer contracts

Are your terms and conditions actually appropriate for the business you operate today?

Businesses often continue using contracts drafted years ago.

Since then, they may have:

• introduced new products;

• started providing services online;

• taken on larger customers;

• entered new markets;

• changed their payment arrangements; or

• begun using artificial intelligence or other technology.

  
  

The contract should reflect the business as it exists now, not the business as it existed five years ago.

2. Getting paid

Cash flow is critical to an SME.

The Government introduced the Commercial Payments Bill in May 2026, proposing measures aimed at tackling late commercial payments, including proposed maximum payment terms, mandatory interest and stronger enforcement powers.

The precise legal position will depend on the legislation and its implementation.

But the underlying commercial lesson is already clear:

Payment terms deserve attention before the contract is signed.

Businesses should know:

• when invoices can be issued;

• when payment is due;

• what happens if an invoice is disputed;

• whether interest can be charged; and

• what remedies are available if the customer does not pay.

  
  

3. Your company structure

As a business grows, its original structure may no longer be appropriate.

Questions can arise about:

• shareholders;

• directors;

• share transfers;

• shareholder agreements;

• management incentives;

• group structures;

• intellectual property ownership; and

• succession planning.

  
  

These issues are particularly important where a business has several shareholders or where family members are involved.

4. Companies House compliance

There are also important changes affecting company administration.

Identity verification is now a legal requirement for relevant directors and people with significant control, with the verification regime being introduced through a transition period.

For an SME, Companies House compliance should not simply be regarded as an annual filing exercise.

Businesses should ensure that their statutory information is accurate and that directors understand their responsibilities.

5. Your employees

Employment law is another area where SMEs can accumulate risk.

Are employment contracts current?

Are policies up to date?

Do managers know how to deal with disciplinary, grievance and sickness issues?

The Employment Rights Act 2025 is introducing significant changes, some of which are already in force and others of which are expected during 2027.

A legal health check should therefore include the employment side of the business.

6. Your intellectual property

For many modern businesses, intellectual property is one of the most valuable assets they own.

But who actually owns it?

For example, if a business pays a freelancer to create:

• software;

• photographs;

• branding;

• website content;

• designs; or

• marketing materials,

  
  

the business should not simply assume that it automatically owns all relevant intellectual property rights.

Ownership and licensing should be properly documented.

7. What happens if something goes wrong?

Perhaps the most important question is:

What happens if the relationship breaks down?

Your contracts should provide a clear framework for dealing with:

• breach;

• non-payment;

• delay;

• defective performance;

• confidentiality;

• intellectual property disputes;

• termination; and

• dispute resolution.

  
  

A contract should not merely explain what happens when everything goes well.

It should also provide a roadmap for when things go badly.

A simple SME legal checklist

Ask yourself:

Contracts: Are our key contracts current?

Payment: Could we enforce our payment terms effectively?

People: Are our employment documents and policies up to date?

Company: Are our shareholders' and directors' arrangements properly documented?

IP: Do we actually own the intellectual property we rely upon?

Data: Are we protecting customer, employee and business information appropriately?

Property: Are our leases, licences and property arrangements documented?

Disputes: Do we know what we would do if a major customer or supplier breached its contract?

Exit: Could the business be sold or transferred without having to resolve years of undocumented arrangements first?

Good legal advice should support good business

The purpose of commercial legal advice is not to make business unnecessarily complicated.

It is to help the business understand its risks so that its owners can make informed commercial decisions.

For an SME, a solicitor should ideally be more than someone you call when a letter before action arrives.

They can be part of the business's wider risk-management team.

At Pure Business Law, we work with businesses on the legal issues that arise throughout their lifecycle from commercial contracts and employment matters to corporate transactions, intellectual property, property and disputes.

The best time to discover a legal problem is usually before it becomes a business problem.

This article is for general information only and does not constitute legal advice. The law and proposed legislation referred to in this article should be checked as at the date of taking specific advice.