Technical due diligence for acquisitions: what buyers should assess
Buying a technology business? What to evaluate in technical due diligence, what the results mean, and how to factor technical debt into your acquisition valuation.
You wouldn't buy a house without a survey. You'd want to know about the subsidence, the dodgy electrics, the extension that was never signed off by building control. You'd want someone independent to tell you what's actually there before you commit hundreds of thousands of pounds.
So why do so many buyers skip the equivalent step when acquiring a technology company?
I've conducted technical due diligence assessments for organisations considering acquisitions, and the pattern is remarkably consistent. Financial due diligence gets done thoroughly. Legal due diligence gets done thoroughly. The technology - often the primary asset being acquired - gets a cursory glance and a reassuring nod from the vendor's own development team.
That's like asking the estate agent to do your building survey.
Why technical due diligence matters in acquisitions
If you're acquiring a technology company, the technology is the asset. Or at least a significant portion of it. The codebase, the infrastructure, the architecture decisions, the team's capability - these aren't secondary considerations. They're what you're buying.
Financial due diligence will tell you about revenue, costs, and projections. What it won't tell you is whether the platform that generates that revenue is held together with the software equivalent of duct tape. It won't flag that the entire application sits in a single, tangled codebase with no separation of concerns. It won't mention that the "maintained" libraries haven't been updated in three years and contain known security vulnerabilities.
These aren't hypothetical examples. I assessed a system for a global humanitarian organisation where independent analysis revealed that 60% of a proposed modernisation budget was actually the vendor's own accumulated technical debt. Without that assessment, the client would have paid to fix problems the vendor had created.
The numbers at an industry level tell a similar story. Research from the Institute for Mergers, Acquisitions and Alliances suggests the majority of technology acquisitions fail to meet their financial objectives. Separately, companies that perform technical due diligence are substantially more likely to achieve a successful outcome. Private equity firms now routinely include technical debt assessment as a standard part of their diligence process. There's a reason for that.
What a technical due diligence assessment covers
A thorough technical due diligence assessment examines seven key domains. If you're evaluating a technology acquisition, these are the areas that need scrutiny:
Technology stack and architecture - Is the technology current or approaching end of life? Is the system well-structured, or is everything crammed into one place? How difficult would it be to make changes or add new features?
Security and compliance - Are there known vulnerabilities? Is data handled in line with GDPR and relevant regulations? When was the last security audit, and what did it find?
Scalability - Can the platform handle growth? If you double the user base in twelve months, does the infrastructure cope, or does it fall over?
Technical debt - How much accumulated shortcut and compromise exists in the codebase? This is where the real costs hide. Oliver Wyman's research suggests technical debt consumes up to 40% of IT budgets. That's money spent running to stand still.
Development practices - Does the team use automated testing? Is there a proper deployment pipeline? How is code reviewed? Poor practices mean higher ongoing costs and greater risk of things breaking in production.
Team capability and key person risk - Is all the knowledge in one developer's head? What happens when they leave? How well documented are the systems?
Intellectual property and dependencies - Does the company actually own what it claims to own? Are there third-party dependencies with licensing implications? Are there open-source components that might restrict commercial use?
Each of these has direct financial implications. None of them appear in a standard financial audit. If you want a structured framework for working through all seven domains, I've published a 96-item technical due diligence checklist that covers them all.
How to factor technical findings into your acquisition valuation
This is where technical due diligence earns its keep. The findings shouldn't sit in a report that gets filed away. They should directly inform your offer price and deal structure.
Technical debt as a line item. If the assessment identifies significant technical debt, that's a cost you'll need to absorb post-acquisition. It should be treated as a liability, the same way you'd treat any other discovered liability during financial due diligence. In the humanitarian organisation case I mentioned, identifying that 60% of proposed costs were actually existing debt fundamentally changed the financial picture.
Risk pricing. Security vulnerabilities, key person dependencies, end-of-life technology - these are all quantifiable risks. The Verizon acquisition of Yahoo saw a $350 million price reduction after undisclosed cybersecurity breaches were discovered during due diligence. That's an extreme example, but the principle applies at every scale.
Opportunity identification. Technical due diligence isn't only about finding problems. Sometimes it reveals that the technology is better than expected, or that there are straightforward improvements that could significantly increase the platform's value. That's useful information when you're planning your post-acquisition strategy.
Walk-away threshold. Not every acquisition should proceed. If the technical assessment reveals fundamental architectural problems, insurmountable security issues, or technical debt so deep that remediation costs exceed the acquisition value, you need to know that before you sign. Walking away is sometimes the right answer. It's certainly better than discovering these issues six months after completion.
Why independence matters
I want to be direct about something. The vendor's development team cannot objectively assess their own work. This isn't a criticism of their competence or honesty. It's human nature. The people who built the system are the least likely to see its flaws clearly. They have context that makes workarounds seem reasonable. They have emotional investment in decisions they made years ago.
The methodology I use in my technical due diligence assessments deliberately withholds the vendor's own documentation and proposals until the independent analysis is complete. This prevents anchoring bias - the tendency to be influenced by what someone else has already concluded. You look at the code, the infrastructure, the practices first. Form your own view. Then compare that with what the vendor claims.
The deliverable from a technical due diligence engagement should be an executive report that translates technical findings into business language. SWOT analysis. Risk register. Prioritised recommendations with cost estimates. Something an operations director or board member can read and act on, without needing to understand the difference between a monolith and microservices.
If your technical due diligence report reads like it was written for software engineers, it hasn't done its job.
When to commission technical due diligence
Timing matters. Too early and you're spending money on deals that might not materialise. Too late and you've lost your negotiating position.
Before signing, during exclusivity. The ideal window is once you've agreed heads of terms and entered an exclusivity period. You have enough commitment from both sides to justify the investment, and enough time to act on the findings before the deal completes.
Allow two to three weeks. A thorough assessment of a mid-sized technology platform typically takes two to three weeks. This includes gaining access to the codebase, conducting the analysis (using AI-augmented tools for large codebases), and producing the executive report. It can be compressed if needed, but rushing defeats the purpose.
What access is needed. At minimum, the assessor needs read access to the source code repository, access to the infrastructure configuration, and ideally a conversation with the technical team. All of this should be conducted under strict confidentiality agreements. It's standard practice and any vendor who refuses access during a serious acquisition process is raising a red flag.
The cost of technical due diligence is a fraction of the acquisition price. The cost of not doing it can be the entire acquisition price.
Buying with confidence, not blind faith
Technical due diligence isn't about finding reasons to walk away from a deal. It's about understanding what you're buying. The same way a building survey doesn't exist to kill property transactions - it exists to make sure you know about the damp course and the roof condition before you set the price.
With UK tech M&A running at nearly GBP 20 billion annually across hundreds of deals, the stakes are significant. Getting the technical assessment right protects both the buyer's investment and the post-acquisition integration plan.
If you're involved in an acquisition where technology is a material part of the value, I'd encourage you to treat technical due diligence with the same rigour as financial and legal diligence. It deserves it.
If you want a starting point, I've published a 96-item technical due diligence checklist that covers all seven assessment domains. It includes a summary scorecard, risk assessment matrix, and findings template. It's the same framework used by professional investors and acquirers, and it's free to download.
If you're considering a specific acquisition and want an independent assessment, get in touch. I'm happy to have a straightforward conversation about what's involved and whether it's the right fit.
