How Technical Debt in Codebases Can Make or Break Your M&A Deal: A Due Diligence Consultant’s Perspective

Introduction

When one tech company acquires another, a deep technical audit is required. I’ll explain why a target company’s approach to this specific problem can be a major red flag or a green light during an M&A deal. Just like numismatists scrutinize coins for imperfections that affect value, technical due diligence examines codebases for flaws that impact valuation.

The Role of Technical Due Diligence in M&A

Technical due diligence is the equivalent of grading a coin’s condition before purchase. For software companies, we examine three critical areas:

1. Code Quality Audit

Like examining a coin under magnification, we analyze:

• Code documentation (or lack thereof)
• Testing coverage percentages
• Code complexity metrics
• Architecture patterns and anti-patterns

A recent acquisition target showed 78% of their code lacked any documentation – the equivalent of finding corrosion on what appeared to be a mint condition coin.

2. Scalability Assessment

We test systems under load to identify bottlenecks, just as collectors test a coin’s metallic composition. Key indicators include:

• Database query optimization
• API response times under load
• Caching strategies
• Horizontal scaling capabilities

3. Technology Risk Analysis

This involves identifying technical debt that could derail post-acquisition integration:

• Outdated dependencies (like finding counterfeit materials in a coin’s alloy)
• Security vulnerabilities
• Licensing compliance issues
• Vendor lock-in risks

Red Flags That Should Stop Your Deal

These warning signs are the equivalent of discovering a counterfeit coin in what was supposed to be a valuable collection:

1. The “Mystery Code” Problem

When no one on the team can explain how core functionality works, this indicates dangerous knowledge silos.

2. “Works on My Machine” Syndrome

A lack of proper CI/CD pipelines suggests deployment risks post-acquisition.

3. The “Frankenstein” Architecture

Multiple incompatible technologies bolted together create integration nightmares.

Green Lights That Signal a Good Acquisition

These positive indicators are like finding a rare mint condition coin:

1. Comprehensive Test Coverage

Aim for >80% unit test coverage with meaningful tests (not just happy paths).

2. Clear Technical Roadmap

Documented plans for addressing known technical debt show maturity.

3. Automated Infrastructure

Infrastructure-as-code and reproducible environments reduce integration risk.

Conclusion: Due Diligence as Valuation Protection

Just as coin collectors learn to spot imperfections that affect value, M&A teams must develop the ability to identify technical risks that impact deal valuation. The most successful acquisitions come from understanding both the surface appearance and underlying quality of the target’s technology stack. Always remember: What you can’t see in the codebase today will become your problem tomorrow.

By focusing on these technical due diligence fundamentals, you can avoid acquiring someone else’s technical debt while identifying truly valuable technology assets worth acquiring.

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