How to Spot Critical Red Flags in Tech Due Diligence: A Guide for M&A Professionals

When one tech company buys another, a thorough technical review is essential. I want to show you how a target company handles this can reveal major warning signs—or give you confidence to move forward in an M&A deal.

The Importance of Technical Due Diligence in M&A

Throughout my career in M&A due diligence, I’ve watched deals rise or fall based on tech assessments. It’s not just ticking items off a list. You’re searching for hidden risks and opportunities that truly shape an acquisition’s outcome. Whether you’re a CTO, an investor, or a consultant, getting these details right is what separates successful integrations from costly mistakes.

Why Code Quality Matters

I always start by looking at code quality. Sloppy, undocumented, or tangled code often points to bigger problems—like heavy technical debt or a lack of engineering standards. On one deal, the target’s product looked solid, but the code was a patchwork of legacy systems and short-term fixes. That red flag revealed scalability problems that could have cost millions after the acquisition.

Assessing Scalability

Scalability isn’t just about more users. It’s about how systems perform under pressure. During due diligence, I check for smart architecture choices—like microservices, load balancing, and clean database design. Green flags include auto-scaling setups and cloud-based infrastructure. If you find a rigid, outdated system with no clear upgrade path, consider it a serious red flag.

Technology Risk Analysis

Every tech stack has risks, from security gaps to reliance on old libraries. In a past deal, the target used a deprecated framework, creating a huge migration hurdle. By sizing up that risk—time, cost, team impact—we helped the buyer negotiate a lower price and plan a safer transition.

Actionable Takeaways for Due Diligence

Here’s what I recommend for effective technical due diligence:

• Review the codebase thoroughly: Combine automated tools and hands-on review to judge quality and maintainability.
• Test scalability under load: Run high-traffic simulations to find weak points.
• Analyze dependencies and tech stack risks: List all third-party tools and check how secure and sustainable they are.
• Talk to the engineering team: Learn about their workflow and culture to anticipate integration challenges.

Practical Examples and Code Snippets

Imagine a target using a custom cache that hasn’t been tested at scale. Here’s code that could cause trouble:


// Inefficient caching implementation
public Object getData(String key) {
if (cache.containsKey(key)) {
return cache.get(key);
} else {
Object data = fetchFromDatabase(key);
cache.put(key, data); // No expiration or size limit
return data;
}
}


Without expiration rules, this might lead to memory leaks under pressure—a clear scalability red flag. Better to use something like this:


// Efficient caching with expiration
public Object getData(String key) {
return cache.get(key, () -> fetchFromDatabase(key), Duration.ofHours(1));
}


Conclusion

Strong technical due diligence can make or break your M&A success. By zeroing in on code health, scalability, and tech risks, you spot problems early and confirm strengths. The aim isn’t just to close the deal—it’s to set up smooth integration and future growth. In my experience, the most telling details are often hidden in the code.

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