How Code Quality Audits Can Make or Break M&A Deals in Tech – A Due Diligence Consultant’s Perspective

Introduction: The Hidden Role of Technical Audits in M&A

When one tech company acquires another, the technical audit often decides the deal’s fate. I’ve spent years on the front lines of M&A due diligence—and let me tell you, a target’s codebase isn’t just lines of text. It’s a mirror of their technical health, culture, and long-term viability.

I’ve seen founders celebrate a signed term sheet, only for the deal to collapse after we unearthed a brittle architecture or unmaintained dependencies. The audit isn’t just a box to check. It’s your best defense against buying someone else’s technical mess. At the heart of this process? The code quality audit, scalability assessment, and technology risk analysis. Get these right, and you’re building a foundation. Miss them, and you’re stacking bricks on sand.

The Importance of Code Quality in M&A

Think of a codebase like a house. The product demo is the freshly painted living room. But the audit? That’s checking the foundation, the wiring, the plumbing. Poor code quality isn’t just a “we’ll fix it later” problem. It means:

• Higher maintenance costs
• Slower feature development
• Increased risk of outages
• More time spent firefighting, less time innovating

None of which excite an acquirer. Clean, maintainable code? That’s a silent sales pitch.

Key Indicators of Code Quality

• Code Readability: Can a new engineer understand what the code does in a reasonable amount of time? Good comments, consistent naming, and logical structure matter.
• Modularity: Are components cleanly separated? Or is everything tangled together? Modular code is easier to test, update, and reuse.
• Test Coverage: Are there automated tests? How much of the code is covered? Tests act as safety nets and documentation.
• Code Reviews: Do engineers review each other’s work? This spreads knowledge and catches bugs early.

Example: Identifying Red Flags

I once audited a startup that had a slick demo and happy customers. But their code? A different story. No documentation. Test coverage under 30%. Components tightly coupled like overgrown vines.

And everywhere, these little time bombs:


// TODO: Refactor this function to handle edge cases
function calculateDiscount(price) {
return price * 0.1;
}


That comment wasn’t a plan. It was a confession. Multiply that across thousands of lines, and you’ve got a codebase that’s fragile, risky, and expensive to own. That’s not a glitch. That’s a warning sign.

Scalability Assessment: Ensuring Future Growth

You’re buying a company not just for what it can do today, but what it can do tomorrow. Can it handle 10x users? 100x? Scalability isn’t just about servers. It’s about architecture, design, and operational maturity.

Ask: Will this system scale without a complete rewrite? Or will we hit a wall six months post-acquisition?

Assessing Scalability

• Database Design: Is the schema efficient? Are tables properly indexed? Poor database design is a common bottleneck.
• Load Balancing: How does the system handle traffic spikes? Are there mechanisms to distribute load? Or will it crash under pressure?
• Microservices Architecture: Is the system broken into independent services? This makes it easier to scale individual parts without overhauling everything.

Case Study: A Scalable System

One company I evaluated had built their backend using microservices orchestrated with Kubernetes. Their database was partitioned, indexed, and designed for high throughput. They used horizontal scaling to add instances as needed, and had monitoring in place to detect issues early.

The result? They handled a 300% traffic spike during a product launch with zero downtime. For an acquirer, that’s not just impressive—it’s valuable. It meant lower risk and a smoother integration.

Technology Risk Analysis: Mitigating Potential Pitfalls

Every tech stack has risks. The key is finding them before they find you. A dependency on an abandoned library. An unpatched security flaw. A database that can’t handle more data. These aren’t “maybe” problems. They’re “when” problems.

Common Technology Risks

• Outdated Technologies: Are they using old frameworks or libraries? These often lack security patches and may not work with modern tools.
• Third-party Dependencies: Are their dependencies actively maintained? Or are they one maintainer away from disaster?
• Security Vulnerabilities: Have they had security audits? Or are they relying on “it’s never been hacked” as a security strategy?

Actionable Steps for Risk Mitigation

1. Conduct Regular Code Reviews: Make it a habit. Catch issues early, share knowledge, and maintain standards.
2. Use Automated Tools: Tools like SonarQube, Snyk, or GitHub Code Scanning can catch bugs, security flaws, and code smells. Use them.
3. Implement CI/CD: Automated testing and deployment reduce human error. They also mean faster, safer releases.

Real-World Example: A Failed Acquisition Due to Poor Code Quality

A few years back, I was working with a larger tech firm acquiring a promising startup. The product was great. The team was smart. The term sheet was signed.

Then we audited the code.

What we found:

• Cyclomatic complexity through the roof—functions with 30+ decision points
• Test coverage below 40%
• Multiple known security vulnerabilities in dependencies

The acquiring team paused. Then pulled out. Why? Because the technical debt wasn’t just high. It was dangerous. Rewriting the code would cost millions and take years. They didn’t want to buy a rebuild.

This isn’t unusual. I’ve seen deals fall apart over things as simple as a missing `package-lock.json` file. The code doesn’t lie.

Conclusion: The Critical Role of Technical Due Diligence

The technical audit isn’t just part of M&A—it’s often the most important part. A good audit helps you:

• Spot hidden risks before they become your problem
• Confirm whether the technology can actually grow with the business
• Plan a realistic integration, with clear milestones and costs

As a due diligence consultant, my job isn’t to kill deals. It’s to make sure my clients know exactly what they’re buying. And in tech, that starts with the code.

So before you sign, ask: Have we seen the foundation? Or are we just admiring the paint job?

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