The Legal Pitfalls for Scale-Ups – Part 1

When we talk about “scale-ups,” the image that often comes to mind is a disruptive tech start-up chasing hockey-stick growth. But scaling is not just the preserve of university spin-outs and app or platform developers. Many established businesses – manufacturers, retailers, professional service firms – reach a point where steady, validated growth turns into something more ambitious: entering new markets, doubling headcount, or launching new product lines.

And that’s where preventable legal missteps can quietly undermine momentum.

This first part of our two-part series focuses on the legal pitfalls most commonly faced by established businesses entering a new phase of expansion.

Pitfall 1: Informal Shareholder and Leadership Arrangements
It’s not uncommon for long-standing businesses to operate on trust and handshakes. But as ambitions rise, so do the stakes. Disagreements over decision-making, succession, or exit strategy can cause damaging disputes.
Mitigation: Put in place a clear shareholders’ agreement and updated articles of association. These should address voting rights, exits, share transfers, and dispute resolution. For founders, consider service agreements that formalise responsibilities, expectations, compensation and termination.

Pitfall 2: Outdated Customer and Supplier Agreements
Businesses that have grown organically may often rely on legacy contracts or informal arrangements. This can expose them to liabilities, unclear payment terms, and costly disputes when entering bigger markets.
Mitigation: Review and refresh contracts with a risk lens. Draft clear standard terms of business and ensure staff are trained on incorporating these terms in supplier and customer contracts. Cover key risk issues such as liability caps, deliverables, and termination rights. Standard terms of business, consistently and unwaveringly used by staff, can dramatically reduce exposure.

Pitfall 3: Employment Issues During Rapid Hiring
Expanding operations means hiring at pace, sometimes without properly drafted employment contracts or policies. This can lead to disputes over dismissals, contractor misclassification, share options or misunderstandings around incentives.
Mitigation: Introduce robust employment contracts and policies. For retention, consider share option schemes, such as enterprise management incentives (EMIs), alongside tax advice. Ensure consultants and contractors have clear agreements that protect the business.

Pitfall 4: Compliance Blind Spots
Expanding into new sectors or geographies can bring regulatory burdens that established teams may underestimate. Data protection, industry-specific licensing, and health & safety are common flashpoints.
Mitigation: Carry out compliance audits early when planning expansion. This allows businesses to anticipate obligations and investments, establish appropriate policies and processes, ensure market alignment – and show regulators, customers, and investors that compliance is taken seriously.

Coming in Part 2

In the next article, we’ll focus on fast-growth, “hockey-stick” scale-ups – where speed, fundraising and innovation amplify the legal risks.

If you have any questions in respect of this article, please do not hesitate to contact me , James Macdonald, Senior Associate in the commercial and corporate team. 

The contents of this article is a general guide only at the date of publication.  It is not comprehensive, and it does not constitute legal advice.  Specific legal advice should be sought in relation to the particular facts of a given situation.