How Poor Technical Due Diligence in M&A Can Cost You Millions – A Consultant’s Warning

The Hidden Costs of Overlooking Tech Due Diligence

When one tech company buys another, a thorough technical review is non-negotiable. Let me share why the target company’s tech health can make or break an M&A deal. With over 200 technical due diligence assessments under my belt, I’ve seen firsthand how skipping this step turns promising acquisitions into costly disasters.

The $47 Million Mistake

I once worked with a client eyeing a SaaS company for $120 million. They almost skipped a deep code review. Our team found the “modern platform” ran on outdated frameworks with no tests. Factoring in the fix costs, we slashed the valuation by $47 million. That’s what poor technical due diligence can cost you.

Core Areas of Technical Due Diligence

1. Code Quality Audit: More Than Just Lines of Code

We start with automated scans using tools like SonarQube, but the real insights come from expert review. Key things we check:

• Test coverage (under 60% raises concerns)
• Technical debt clues (like TODO/FIXME comments)
• Whether architecture is documented (or missing)

// Example of problematic code we frequently encounter
public class EverythingService {
// TODO: Refactor this god class - 4,200 lines!
// FIXME: Memory leak when processing >10,000 records
}

2. Scalability Assessment

A product might work fine for 100 users, but will it handle 100,000? We test loads at 3-5 times expected growth. In one e-commerce deal, the checkout system failed at just 50 users—far short of the claimed 10,000. That kind of surprise can derail an entire acquisition.

3. Technology Risk Analysis

We group risks into three categories:

• Red: Deal-breakers (unsupported tech, security flaws)
• Yellow: Needs a fix plan (technical debt, weak docs)
• Green: Good practices (CI/CD, monitoring, modern stack)

Actionable Due Diligence Framework

Here’s the 5-step process we rely on:

1. Pre-Audit Questionnaire: Send 87 tech questions two weeks ahead
2. Infrastructure Review: Study cloud setups and deployment methods
3. Code Sampling: Inspect real code, not just demos
4. Team Interviews: Talk directly with engineers, not only managers
5. Risk Scoring: Score risks across 12 key areas

When to Walk Away

Some warnings should stop a deal in its tracks:

“If the CTO can’t explain their own system diagrams, or developers confess to delaying crucial updates for years, listen closely. Those aren’t just red flags—they’re blaring alarms.”

Final Thoughts

Technical due diligence isn’t about finding flawless code—every company has some tech debt. The real goals are to:

• Measure the true state of the technology
• Spot deal-breakers early
• Estimate realistic repair costs
• Match the price to what you’re actually getting

Successful tech acquisitions hinge on asking the right questions before signing. Don’t let flashy demos hide shaky code or poor architecture—your millions depend on it.

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