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August 27, 2025
Tech Due Diligence Decoded: How Code Quality and Scalability Make or Break M&A Deals
When tech companies merge, everyone focuses on revenue projections – but the real story lives in the codebase. After 12 years reviewing tech stacks for acquisitions, I’ve watched promising deals crumble over issues that never showed up on financial statements. Let me share why technical due diligence often decides whether an M&A deal succeeds or fails.
When Good Deals Go Bad: A Technical Reality Check
Last year, a hot SaaS startup looked perfect on paper – until we tested their systems. Their proud “scalable infrastructure” couldn’t handle more than 5,000 users. For an acquirer needing 500,000-user capacity? Deal breaker. That $120M acquisition died in the tech review phase.
Cracking Open the Codebase: Your First Reality Check
The first thing we do in technical due diligence? Read the actual code. Not the documentation – the raw implementation. Here’s what separates healthy systems from ticking time bombs.
5 Code Quality Red Flags We Can’t Ignore
- Spaghetti Code Alert: Modules scoring above 15 on complexity indexes make us nervous
- Test Gaps: Less than 70% coverage in critical systems? That’s asking for trouble
- Changing Chairs Mid-Game: Constant rewrites of core functionality signal instability
- Ancient Dependencies: Outdated libraries with security holes become our problem post-acquisition
- Architecture Drift: When current code doesn’t match the blueprint, costs explode
True Story: During a fintech acquisition, we found a payment processing module so tangled it took 8,000 lines to do what should’ve been 800. Zero tests. Seven years without updates. This single discovery slashed 40% off the purchase price.
Quick Code Health Checklist
Here’s the exact script I use when first assessing a codebase:
# Spotting Technical Debt Hotspots
function calculate_risk(repo):
risk_score = 0
if repo.avg_complexity > 25:
risk_score += 50 # Major rewrite needed
if repo.test_coverage < 60:
risk_score += 30 # Bug likelihood high
if repo.dependencies.outdated > 15%:
risk_score += 20 # Security vulnerabilities
return risk_score
Scalability Tests Don’t Lie
When founders boast about “limitless scalability,” we bring proof-of-load testing. Marketing claims evaporate fast under real traffic simulations.
Our 3-Part Scalability Stress Test
- Blueprint Reality Check: Mapping actual data flows vs. promised architecture
- Traffic Tsunami: Gradually overwhelming systems until they break
- Controlled Chaos: Simulating disaster scenarios no one wants to discuss
Reality Bites: An AI startup claimed 10,000 requests/second capacity. Our testing showed:
- Performance tanked at 1,200 requests
- Response times jumped from 85ms to 12 seconds under load
- One Redis server failure would kill the entire service
The acquirer walked – growth numbers couldn’t outweigh technical risk.
Hidden Risks That Derail Deals
Beyond code quality, we hunt these four silent killers during M&A tech reviews:
1. IP Landmines
68% of companies we review have open-source compliance issues. One client dodged a $20M lawsuit by finding GPL violations before papers were signed.
2. Security Shortcuts
We still find horrors like:
- Unencrypted customer data
- “admin/admin” logins in production
- Database instances wide open to the internet
One recent find triggered $3.8M in immediate fixes.
3. The “Bus Factor” Problem
A video platform nearly collapsed post-acquisition when their entire transcoding system depended on one freelancer with no documentation.
4. Yesterday’s Tech, Tomorrow’s Headache
That “stable” legacy system often hides costs like:
// Maintenance nightmare detected
alert(
"COBOL dependency found",
CRITICAL,
"Migration estimate: 18 months, $2.7M"
)
Practical Playbook for Both Sides
Buyers: Verify Before You Trust
- Get read access to CI/CD pipelines – commit history tells truth
- Request architecture decision records (the why behind systems)
- Simulate outages with the engineering team – watch how they react
Sellers: Prepare to Impress
- Keep technical docs updated like you’re always fundraising
- Enforce code quality gates – no exceptions
- Document who knows what – reduce key-person dependencies
“Companies that treat code quality as daily hygiene sleep better during due diligence.” – Engineering Lead at 3x-acquired startup
The Bottom Line: Tech Diligence as Your Secret Weapon
In today’s competitive M&A landscape, technical reviews make the difference between smart buys and expensive mistakes. Comprehensive code audits and scalability tests help investors:
- Prevent 7 out of 10 integration disasters
- Spot engineering cost savings early
- Uncover hidden value in well-architected systems
The smartest acquirers know: Today’s clean codebase is tomorrow’s competitive advantage. Approach technical due diligence not as a hurdle, but as your roadmap to acquisition success.
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