5 Critical Tech Due Diligence Red Flags That Can Derail Your M&A Deal

When Technical Debt Sinks Deals: An M&A Consultant’s Hard-Won Lessons

After reviewing hundreds of acquisition targets, I’ve seen more deals collapse from hidden tech issues than from financial problems. Let me share what keeps acquisition teams awake at night – and how to spot true deal-breakers before they cost you millions.

Seeing Beyond the Surface: What Really Matters in Tech Stacks

When Pretty Code Hides Ugly Truths

That polished demo? Meaningless. What matters is what happens when 10,000 users hit the system at midnight. Here’s what we always check first:

• The Maintenance Trap: Reasonable tech debt vs. unmaintainable spaghetti code
• The Open Source Gamble: Properly licensed components vs. legal time bombs
• The Team Handoff Test: Can new engineers understand this in under a week?

“Last quarter, a $20M deal died when we found a critical payment module held together by outdated libraries no one understood.”

Your Tech Evaluation Checklist

Every acquirer needs these non-negotiables:

def should_acquire?(tech_stack):
security = audit_vulnerabilities(tech_stack)
scalability = stress_test(peak_load * 3)
documentation = check_howto_guides()
return security.passed? && scalability.passed? && documentation.exists?

Scalability: The Silent Deal Killer

Infrastructure That Can’t Grow With You

These bottlenecks destroy post-acquisition plans:

• The User Limit: Systems that crash above 500 concurrent users
• The Database Time Bomb: Hardcoded limits with no clustering
• The Deployment Nightmare: Manual processes requiring original developers

A Real-World Horror Story

We once found an “enterprise” platform running on:

// Authentication "System"
function checkPassword(user) {
// No encryption
// Compares plaintext in SQL query
// Returns true if error occurs
}

The Hidden Risks You Can’t Afford to Miss

Shadow IT Landmines

Nearly 1 in 4 acquisitions discover unauthorized systems post-close. Protect yourself:

• Run automated dependency checks (like Snyk or WhiteSource)
• Verify cloud service contracts line-by-line
• Audit admin access across all environments

When “Good Enough” Is Actually Dangerous

“We almost walked from a great acquisition because of messy code – until we realized their disaster recovery process was the best I’ve ever seen.”

The Practical Tech Due Diligence Toolkit

Tools That Reveal The Truth

These never leave my investigation kit:

How Tech Flaws Impact Valuation

Recent deals show:

• 28% average reduction for missing test coverage
• $2M security escrow holds for outdated encryption
• Complete deal collapse when core APIs couldn’t scale

The Bottom Line: Protect Your Deal

Technical due diligence isn’t about perfection – it’s about avoiding surprises that rewrite deal terms six months post-close. Treat code like wiring in a house purchase: some wear is expected, but faulty foundations will burn you.

Action Steps for Smart Acquirers:

• Demand full access to key systems before LOI
• Test under real-world loads, not ideal conditions
• Follow the data trail – where are the real pain points?
• Bring engineers into discussions early, not just finance teams

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