Technology Due Diligence: What PE Firms Miss and Why It Matters

The Due Diligence Gap

Private equity firms have sophisticated processes for financial, legal, and commercial due diligence. Technology due diligence, by comparison, is often superficial — a checklist review by consultants who lack the operational depth to identify the risks that actually destroy value post-close.

The consequences are predictable. Integration costs exceed projections. Technical debt requires unplanned investment. Key engineering talent leaves. Platform modernization timelines slip by years. What looked like a technology-enabled business turns out to be a technology-constrained one.

What Comprehensive Tech DD Covers

Architecture Assessment

Understand the actual state of the technology — not what the management presentation shows, but what the code, infrastructure, and technical team reveal:

System architecture: How are applications structured? Are they monolithic or distributed? What are the dependencies between systems? Where are the single points of failure?

Technical debt inventory: Every technology organization has technical debt. The question is how much, where it is concentrated, and how it affects the business. Quantify the investment required to address critical debt.

Scalability analysis: Can the current architecture support the growth assumptions in the investment thesis? If the plan assumes 3x revenue growth, can the technology handle 3x the load without fundamental rearchitecture?

Security posture: Review the security architecture, vulnerability history, compliance status, and incident response capabilities. Security issues discovered post-acquisition can be extremely expensive to remediate.

Team Assessment

Technology is built and maintained by people. Understanding the team is as important as understanding the code:

Key person risk: Identify individuals whose departure would materially impact the business. In many mid-market companies, critical knowledge lives in one or two people's heads.

Skill gaps: Assess whether the team has the skills needed to execute the post-acquisition technology roadmap. Skill gaps that require external hiring or consulting add cost and time.

Culture and retention risk: Acquisitions create uncertainty. Engineers with options may leave. Understand the team's morale, compensation competitiveness, and flight risk.

Development practices: How does the team build and deploy software? Mature practices (CI/CD, automated testing, code review) indicate a team that can move fast and adapt. Immature practices indicate hidden risk.

Infrastructure and Operations

Cloud vs. on-premises: Understand the current infrastructure model and the cost implications. On-premises infrastructure may require significant capital investment or cloud migration.

Operational maturity: How is the technology operated? Is there 24/7 monitoring? Automated alerting? Documented runbooks? Disaster recovery procedures? Immature operations create reliability risk.

Vendor dependencies: Identify critical vendor relationships, contract terms, and renewal timelines. Unfavorable contracts or vendor concentration can be material.

Licensing and compliance: Review software licenses for compliance issues. Open-source license violations, unlicensed software, and non-transferable licenses can create legal and financial exposure.

Red Flags

Based on dozens of technology due diligence engagements, these findings consistently indicate higher-than-expected post-acquisition costs:

No automated testing: If the company does not have automated tests, every change carries risk. This slows development and increases the cost of integration and modernization.

Single production environment: If there is no staging or testing environment, changes cannot be validated before going live. This indicates immature development practices.

Undocumented systems: If critical business logic exists only in the heads of a few engineers, you have significant key person risk and knowledge transfer challenges.

Legacy integrations: Point-to-point integrations between systems, especially those using deprecated protocols or manual data transfers, are expensive to maintain and difficult to extend.

Deferred security: If the company has never conducted a penetration test, has known unpatched vulnerabilities, or lacks basic security controls, remediation will be significant.

Quantifying Technology Risk

Technology findings should be translated into financial impact:

• Technical debt remediation: Estimate the engineering investment required to address critical technical debt
• Infrastructure modernization: Cost of cloud migration, hardware refresh, or platform modernization
• Integration costs: Engineering effort required for system integration post-acquisition
• Security remediation: Investment needed to reach acceptable security posture
• Team augmentation: Cost of filling skill gaps through hiring or consulting
• Operational improvements: Investment in monitoring, automation, and processes

Present these costs as adjustments to the financial model. A platform that needs $2M in technical debt remediation should be factored into the purchase price or the post-acquisition capital plan.

Making DD Actionable

Technology due diligence should produce more than a report. It should inform:

• Deal pricing: Risk-adjusted valuation based on technology findings
• 100-day plan: Specific actions for the first 100 days post-close
• Integration roadmap: Technology integration timeline and resource requirements
• Retention strategy: Plans to retain key technical talent
• Investment thesis validation: Confirmation or challenge of technology-dependent assumptions in the investment thesis