How Code Quality Audits Expose Hidden Risks in M&A Tech Due Diligence

When Tech Companies Merge, Technical Debt Can Sink the Deal

When one tech company buys another, a thorough technical review is essential. I want to share why a target company’s code quality and scalability can make or break an M&A deal. Over 12 years of leading tech due diligence for acquisitions from $20M to $2B, I’ve seen how messy legacy systems and poor architecture choices wreck integration timelines—and sometimes end deals completely.

The 4 Pillars of Technical Due Diligence

1. Code Quality Audit: The Canary in the Coal Mine

We always begin with static analysis tools like SonarQube, plus hands-on code reviews. One target company claimed “92% test coverage” in their pitch. Our audit told a different story:

• Over 400 test files with empty test methods
• No integration tests for their payment logic
• Serious security flaws in third-party libraries

That discovery dropped the acquisition price by 18% because of the fix costs.

2. Scalability Assessment: Future-Proof or Time Bomb?

A SaaS firm handling 5 million monthly transactions said their setup could “scale infinitely.” Our load testing showed otherwise:

// Example of problematic code we frequently encounter
public Order processOrder(Order order) {
// No connection pooling
Connection conn = DriverManager.getConnection(dbUrl);
// Synchronous DB call blocks entire thread
Order result = repository.save(conn, order);
conn.close();
return result;
}

At three times normal load, their API slowed from 200ms to 14 seconds. That was a dealbreaker.

3. Technology Risk Analysis: The Hidden Liabilities

We use a custom scoring system to check:

• License risks (like GPL code in commercial products)
• Outdated cryptography methods
• Vendor lock-in from proprietary databases

One target relied on MongoDB 2.4, which reached end-of-life in 2016. A full database migration added $2.3M to the integration bill.

4. Architecture Review: Blueprint for Integration

Microservices aren’t always the answer. We look for:

• Clear domain boundaries aligned with business needs
• Handling of eventual consistency
• Sensible orchestration vs. choreography

A “microservices” startup had 78 services with circular dependencies. It was a distributed monolith in disguise.

Red Flags That Kill Deals (Real Examples)

These issues have ended negotiations:

“Our engineers don’t write tests because we move too fast” (Series D unicorn)

“The original dev team left 2 years ago and nobody understands the core algorithm” (AI startup)

Green Lights That Accelerate Acquisitions

We love seeing:

• Detailed runbooks for handling incidents
• Automated infrastructure with tools like Terraform or Ansible
• Feature flags for smooth rollouts

Actionable Due Diligence Checklist

If you’re getting ready to sell, start with these steps:

1. Run static analysis on your main branch now
2. Document your top three technical debts
3. Load test beyond your current peak traffic
4. Create a repository for architecture decision records

Due Diligence as Competitive Advantage

Technical due diligence isn’t just about avoiding risk—it’s a strategic edge. Companies with clean audits get higher valuations and close faster. The best exits I’ve seen treat code quality like a balance sheet item, years before any deal talks begin.

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