5 Code Quality Red Flags That Kill M&A Deals (And How to Spot Them)

Why Code Quality Makes or Breaks Tech Acquisitions

When tech companies make acquisitions, you need a thorough code checkup – not just financial audits. From my 12 years of vetting codebases for deals from $5M to $500M, I’ve watched more transactions collapse over hidden tech problems than accounting issues. Let me show you what really matters when examining a target’s software health.

The Hidden Dealbreaker Most Buyers Miss

Last year, 63% of failed tech acquisitions blamed technical debt in their post-mortems. Here’s what keeps buyers up at night: the real cost isn’t just rewriting messy code. It’s missing out on growth because the tech can’t scale when you need it most.

5 Code Red Flags That Should Alarm Every Acquirer

1. Ghost Town Documentation

When I find code like this:

// TODO: Fix this later (added 2018)
function processUserData() {
// Magic numbers everywhere
let x = 0.327;
// Undocumented API calls
fetch('https://internal-api/v2/legacy/user')
}

…I know we’re in trouble. Good documentation isn’t just nice-to-have – it’s your maintenance cost crystal ball. Targets with under 30% code docs typically triple integration developer costs. I’ve seen teams waste months untangling mystery functions that “just worked” for the previous team.

2. Test Coverage That’s All Show

One acquisition target proudly showed us 85% test coverage. Then we found:

// Tests passing but verifying nothing
it('should work', () => {
expect(1+1).toEqual(2);
});

Real tests mirror actual user behavior, not just pad stats. Our rule? Below 60% meaningful branch coverage means automatic deal price negotiations. Because paper-thin tests lead to real-world crashes.

Scaling Reality Check

When “High Performance” Meets Real Users

Targets love boasting load tests like “handles 10,000 users!” But when we ran:

// Simulate real-world spike
test.concurrent('Black Friday traffic', async () => {
await simulateCartAdds(15000);
await applyPromoCode('BF2023'); // Triggers complex eligibility checks
});

…their system choked at 2,300 concurrent shoppers. True scalability isn’t about perfect lab conditions – it’s how well it holds up when things get messy.

Hidden Risks in the Tech Stack

The Dependency Nightmare

During one e-commerce platform review, we discovered:

"dependencies": {
"vue": "^1.0.28", // Released 2016
"express": "4.16.4", // 127 known vulnerabilities
"legacy-payment-module": "git+ssh://internal-repo"
}

Ancient dependencies aren’t just tech debt – they’re legal liabilities waiting to happen. Outdated packages with known vulnerabilities increase post-acquisition firefighting by 47%. Now we demand full software ingredient lists before any deal.

Your Practical Due Diligence Toolkit

Calculating Real Technical Debt

Use our field-tested risk matrix:

• Dealbreakers (Walk Away)
• Zero automated deployments
• Critical features in dead-end languages
• Negotiation Triggers (20-35% Price Cut)
• Giant monoliths with no split strategy
• “Snowflake” frameworks only original devs understand

The Bottom Line: Code Tells the Truth

Technical due diligence isn’t about finding perfect code – it’s about uncovering what you’re really buying. The smartest acquirers treat code reviews as strategic advantages, not paperwork exercises. One hard lesson: if you can’t measure the tech debt, you’ll always overpay.

Pro Tip: Always ask to see the “/legacy” folder before signing – that’s where acquisition dreams go to die quietly.

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