Decoding Tech Health: How Code Audits Make or Break M&A Deals

When Code Quality Determines Deal Value

When a tech company considers acquiring another, there’s a make-or-break step many overlook: understanding the actual health of the code. Let me show you what I’ve learned after 12 years of evaluating companies for acquisitions – some worth over $2B. The truth is, while spreadsheets show financials, code shows reality.

The Ghosts in the Machine

Picture buying a beautiful antique chest only to find rotting wood inside. That’s exactly what happens when acquirers discover poorly maintained systems during M&A tech reviews. Last year, I found a company where nearly half their API connections were undocumented patches – like discovering structural cracks in a house you just bought.

The Three Pillars of Technical Due Diligence

1. Code Quality Insights

We start by examining code history like detectives reviewing case files. Three key signs tell us if a company’s tech is investment-worthy:

• Technical Debt Ratio: More than 30% messy code means future headaches
• Documentation Quality: Less than 15% commented code often indicates cutting corners
• Coding Consistency: Multiple styles suggest shifting priorities or leadership

Here’s real code we found in a payment company during review:

# Legacy authentication "temporary" fix (added 2017)
def validate_user(user):
try:
return db.query("SELECT * FROM users WHERE id = %s" % user.id)
except:
print("oops")
return True

This single function had three critical issues: SQL injection risks, silent errors, and security gaps. Finding 47 similar examples across their systems reduced the company’s value by $8M during negotiations.

2. Scalability Reality Check

True scalability means costs grow slower than users. Here’s how we measure it:

One SaaS company’s costs skyrocketed at just 5,000 users due to database limitations. Their fix would take 18 months – time the buyer didn’t have.

3. Risk Assessment Essentials

We evaluate three critical risk areas:

• Dependency Dangers: Outdated libraries often lead to system failures
• Knowledge Spread: Can multiple engineers explain core systems?
• Upgrade Challenges: How much is stuck in old systems?

An e-commerce acquirer learned their “AI” recommendations ran on one person’s uncommented Perl code. The $120M deal needed $15M extra for immediate system replacement.

Practical Audit Approaches

Essential Due Diligence Steps

Our non-negotiable audit process includes:

• Automated code quality scans
• Live architecture walkthroughs
• Production incident reviews
• Core service rebuild tests
• Third-party dependency checks

Deal-Breaking Red Flags

These issues frequently derail acquisitions:

• Microservices that depend on each other in loops
• Critical systems with under 60% test coverage
• Overly complicated core logic
• Systems needing regular reboots
• Outdated security practices

The Green Lights That Speed Up Deals

These practices significantly increase company value:

• Consistent infrastructure patterns
• Quick rollback capabilities
• Business-focused monitoring
• Architecture decision records
• Proactive failure testing

A health tech startup impressed us with automatically updated system diagrams. This transparency added 22% to their final price.

Smart Tech Reviews Protect Value

Technical due diligence separates solid investments from expensive problems. Through thorough code audits, realistic scalability checks, and smart risk assessment, buyers avoid costly surprises. Companies with clean, well-maintained systems consistently command better prices – while others face tough negotiations.

Here’s a proven tip: Ask acquisition targets to containerize their core system during review. This simple test reveals more about their tech health than months of paperwork.

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