Technology Due Diligence: What to Assess Before Acquiring a Business

You're evaluating an acquisition. The business looks attractive: good revenue, profitable operations, established customer base. You're close to making an offer.

But you haven't evaluated the technology underneath.

This is a common and expensive mistake. A business that looks good on paper can have:

• Crumbling technology infrastructure
• Security vulnerabilities creating liability
• Outdated systems that require expensive replacement
• Critical dependencies on key person knowledge
• Hidden technical debt that will require major investment
• Systems incompatible with your infrastructure
• Data quality and integrity issues

A technology assessment during due diligence can reveal problems that materially affect the acquisition price, or show issues severe enough to reconsider the deal entirely.

In this guide, I'll share the framework for comprehensive technology due diligence in M&A situations. Whether you're acquiring a 5-person service company or a 100-person SaaS business, this assessment is essential.

Why Technology Due Diligence Matters

Technology isn't a nice-to-have in modern businesses—it's core to operations.

Issues discovered after acquisition create:

Financial Impact:

• Unexpected infrastructure replacement costs ($50,000-$500,000+)
• System integration costs higher than expected
• Data migration costs and complications
• Extended timeline to synergy

Operational Impact:

• Service disruptions during transition
• Key functionality lost if dependent on person/system
• Customer churn if systems change significantly
• Staff productivity disruption during transitions

Legal/Compliance Impact:

• Undisclosed security vulnerabilities (liability risk)
• Compliance violations (HIPAA, GDPR, PCI, etc.)
• IP infringement or unresolved licensing
• Data breach exposure

Strategic Impact:

• Limits ability to integrate quickly
• Constrains growth trajectory
• Technology debt becomes your problem
• Impacts acquisition ROI

Getting technology assessment right de-risks the acquisition significantly.

Technology Due Diligence Framework

Comprehensive tech assessment covers 8 key areas:

1. Infrastructure and Systems Assessment

What You're Evaluating

The physical and digital infrastructure supporting the business.

Key Questions

On-Premise Hardware:

• What servers, network equipment, and systems exist?
• Age and condition? (5+ year old equipment is EOL)
• Maintenance status? (Supported or obsolete?)
• Redundancy and failover? (What happens if a server dies?)
• Power and cooling? (Adequate for growth?)
• Security? (Locked, monitored, accessed appropriately?)

Cloud Infrastructure:

• What cloud platforms? (AWS, Azure, Google Cloud, etc.)
• Which services? (Compute, storage, databases, etc.)
• Cost? (Is pricing optimized or bloated?)
• Architecture? (Single region, redundancy, etc.)
• Scale limits? (Can it grow, or will it cap out?)

Network:

• Internet connectivity? (How many connections, reliability?)
• Network architecture? (One network, VLANs, segmentation?)
• WiFi? (If present, quality and coverage?)
• Redundancy? (What happens if internet goes down?)
• VPN and remote access? (Secure, working well?)

Monitoring and Operations:

• Systems monitored? (Do they know when something fails?)
• Uptime? (What's the actual availability vs. marketed?)
• Incident response process? (How are outages handled?)
• Backups? (Regular, tested, restorable?)
• Documentation? (Do they know what they have?)

Red Flags:

• Equipment 10+ years old and not maintained
• No redundancy or backup
• No monitoring (flying blind)
• Single internet connection (outage = business down)
• Ad-hoc, undocumented infrastructure
• Significant unplanned downtime

2. Application and Software Systems

What You're Evaluating

The software applications running the business.

Key Questions

Core Business Systems:

• What applications run the business? (ERP, CRM, accounting, etc.)
• Are they modern, established, or proprietary?
• Who provides support/maintenance?
• What's the cost? (License, support, hosting)
• Licensing terms? (How does acquisition affect licenses?)

Custom Development:

• Any custom-built systems? (Built in-house or outsourced?)
• Who built them? (Still available for support?)
• Code quality? (Maintainable or nightmare?)
• Documentation? (Source code comments, architecture docs?)
• Version control? (Git/Github or ad-hoc files?)
• Testing? (Automated tests or manual only?)

Third-party Integrations:

• How many third-party systems integrate?
• Integration points stable or fragile?
• If third-party API changes, will integrations break?
• Cost to replace integrations?

Scalability:

• Can systems scale to support growth?
• Database size and growth rate?
• Will systems scale 2x, 10x without replacement?
• Performance bottlenecks identified?

Red Flags:

• Key system is proprietary/in-house and original developer unavailable
• No documentation of custom systems
• Spaghetti code or obvious technical debt
• Systems at capacity or close to it
• Critical integrations fragile or undocumented
• Untested changes regularly pushed to production

3. Data Assessment

What You're Evaluating

The quality and integrity of data, which is often more valuable than systems.

Key Questions

Data Inventory:

• What data exists? (Customer, financial, operational)
• How much? (Database sizes, growth rate)
• Where's it stored? (Single database, multiple systems, spreadsheets?)
• How old is the oldest data? (Long retention?)

Data Quality:

• Is data accurate? (Spot check for errors)
• Is data complete? (Missing fields, incomplete records?)
• Is data consistent? (Same customer info in multiple places, or inconsistent?)
• Duplicate records? (Customer deduplication done?)
• Data validation? (Garbage in, garbage out, or validated?)

Data Security:

• Is sensitive data encrypted? (Encryption in transit and at rest?)
• Access controls? (Who can see what data?)
• Deletion policy? (When is old data removed?)
• Compliance? (GDPR, HIPAA, PCI requirements met?)

Data Backup and Recovery:

• Backups taken regularly? (Daily, weekly?)
• Tested restoration? (Can they actually restore if needed?)
• Backup location? (On-site, off-site, cloud?)

Data Migration:

• How hard to migrate this data? (Clean export, or manual effort?)
• Will you keep this data or replace the system?
• Mapping required? (Fields between systems different?)

Red Flags:

• No inventory of what data exists
• Known data quality issues not addressed
• No backup or backup not tested
• Sensitive data stored in plain text or spreadsheets
• Compliance violations
• Data scattered across multiple systems with no single source of truth

4. Cybersecurity and Compliance

What You're Evaluating

Security posture and compliance with regulations.

Key Questions

Security Practices:

• Firewalls, intrusion detection, monitoring?
• Endpoint security (antivirus, EDR) on devices?
• Multi-factor authentication for critical systems?
• Regular security updates and patching?
• Network segmentation? (Critical systems isolated?)
• Incident response plan? (What happens if breached?)

Compliance:

• What regulations apply? (HIPAA, PCI, GDPR, SOX, etc.)
• Are they actually compliant? (Audit trail, assessments?)
• Open violations or audit findings?
• How long have they been compliant?

Access Control:

• Who has access to what? (Documented?)
• Principle of least privilege followed? (People have minimum necessary access?)
• Privileged access managed? (Admin credentials, service accounts?)
• Offboarding process? (Former employees locked out promptly?)

Vendor Security:

• Third-party vendors with access, are they vetted?
• Non-disclosure agreements? (Protecting sensitive data?)
• Data processing agreements in place?

Security Testing:

• Penetration tests done? (When, findings?)
• Vulnerability scans regular? (Who does them?)
• Bug bounty program? (For software vendors?)

Red Flags:

• No security monitoring or incident response
• Known vulnerabilities not patched
• Compliance violations
• Poor access control (everyone has admin access)
• No multi-factor authentication
• Former employees still have access
• No incident response plan
• Breach history without proper remediation

5. Team and Knowledge Assessment

What You're Evaluating

Whether critical knowledge is documented or locked in individuals.

Key Questions

Technical Staff:

• How many tech people? Are they dedicated or part-time?
• What's their expertise? (Do they understand the systems?)
• Documentation of responsibilities? (Who does what?)
• Knowledge transfer plan? (If they leave, will you manage?)

Key Person Dependency:

• Are critical systems dependent on specific people?
• What if that person quits? (Can you continue?)
• Is documentation in place? (Or locked in someone's head?)
• Are they willing to stay post-acquisition?

Development Practices:

• Code review process? (Quality control?)
• Deployment process? (Manual, automated, safe?)
• Change management? (How are changes approved?)
• Documentation of architecture and decisions?

Vendor Relationships:

• Who's your software vendor contact?
• Maintenance contract in good standing?
• Update schedule communicated clearly?

Red Flags:

• Critical systems dependent on one person
• No documentation of architecture or decisions
• High turn-over in tech team
• No process for code review or quality control
• Key people unwilling to stay post-acquisition

6. Intellectual Property and Licensing

What You're Evaluating

Whether the technology rights are clear and properly licensed.

Key Questions

Ownership:

• Who owns custom software? (Company or contractor?)
• Proper assignment of IP? (Legal paperwork in place?)
• Licensing of third-party components? (Open source compliance?)

Open Source:

• Any open source software used?
• Licenses reviewed for compliance? (GPL, MIT, Apache, etc.)
• License obligations met? (Open sourcing required code, attribution?)
• Risk of license violation?

Third-party Software:

• All software properly licensed?
• License agreements reviewed?
• Compliance with audit provisions?
• Transfer rights in acquisition? (Can you continue using?)

Trademarks and Domain:

• Who owns domain names?
• Are they registered properly?
• Transfer process understood?

Patents:

• Any patent filings? (Technology worth protecting?)
• Patent litigation risk? (Any prior disputes?)

Red Flags:

• Unclear IP ownership
• Open source not properly licensed
• License agreements not reviewed
• Unlicensed software use
• Copyright infringement risk
• Domain names in personal names, not company
• Patent infringement risk

7. Disaster Recovery and Business Continuity

What You're Evaluating

Whether the business can survive disasters or disruptions.

Key Questions

Backup and Recovery:

• Backups taken regularly? (Daily?)
• Off-site backups? (Disaster recovery, not just local backups?)
• Recovery tested? (Proven restorability?)
• Recovery time objective (RTO)? (How long to recover?)
• Recovery point objective (RPO)? (How much data loss acceptable?)

Redundancy:

• Single points of failure identified?
• Redundant systems where critical? (Dual internet, dual power, etc.)
• Failover tested? (Does automatic failover actually work?)

Business Continuity Plan:

• Plan exists? (Written, not just in someone's head?)
• Plan tested? (Does it actually work when needed?)
• Remote work capability? (Can work continue if office unavailable?)
• Communication plan? (How to reach staff if disaster?)

Red Flags:

• No backup or backup not tested
• Only local backups, no off-site
• Single internet connection (outage = down)
• No redundancy for critical systems
• No business continuity plan
• No remote work capability
• Recovery time in hours or days, not minutes

8. Technical Debt and Future Plans

What You're Evaluating

Whether infrastructure is modern or requires replacement.

Key Questions

Modernization:

• Are systems up-to-date or aging?
• Known problems needing fixing?
• Technical debt affecting growth?
• Product roadmap including tech improvements?

Growth Capacity:

• Can systems support 2x growth? 10x?
• Do systems need replacement for growth?
• Capital expenditure needs identified?

Strategic Alignment:

• Technology strategy aligned with business goals?
• Cloud migration planned?
• Integration with your systems planned?

Roadmap:

• Does vendor/system have future roadmap?
• Vendor stability? (Won't be acquired/discontinued?)

Red Flags:

• Significant technical debt acknowledged but unfunded
• Systems can't scale to 2x current size
• No product roadmap or vendor transparency
• Vendor in decline or deprecated
• Major replacement planned within 1-2 years

Technology Due Diligence Process

Phase 1: Preliminary Assessment (Week 1-2)

Kickoff Questions:

• Provide current infrastructure overview
• Provide system architecture diagram
• Provide staffing and responsibilities
• Provide compliance requirements
• Provide IT budget breakdown

Initial Review:

• Infrastructure and system list
• Age and support status of critical systems
• Known issues and problems
• Current IT staffing and costs

Output: Initial red flags identified; proceed or recommend deeper due diligence

Phase 2: Detailed Assessment (Week 2-4)

Infrastructure Audit:

• Inventory all servers, systems, network equipment
• Document configuration, age, support status
• Assess capacity and redundancy
• Review monitoring and backup

Application Assessment:

• Document all business systems
• Review code quality (for custom systems)
• Test integrations
• Assess scalability

Data Assessment:

• Database inventory and size
• Data quality sampling
• Backup verification
• Compliance assessment

Security Assessment:

• Vulnerability scan
• Access control review
• Compliance audit
• Incident history review

Team Assessment:

• Org chart and responsibilities
• Interview technical staff
• Knowledge dependency evaluation
• Retention risk assessment

Output: Detailed findings and risk assessment

Phase 3: Validation (Week 4-5)

Testing:

• Backup/recovery test
• Failover test (if applicable)
• Performance testing under load
• Security vulnerability confirmation

Interviews:

• Deep dives with technical team
• Vendor/vendor relationship assessment
• Key person interviews

Output: Validated findings and risk scoring

Phase 4: Reporting (Week 5-6)

Report includes:

• Executive summary of major findings
• Detailed assessment by category
• Risk scoring (high, medium, low)
• Estimated integration costs and timeline
• Recommendations

Presentation:

• Findings to acquisition team
• Cost implications
• Risk mitigation recommendations
• Integration planning

Cost of Technology Due Diligence

Doing it right costs money but saves much more:

Small business ($1-5M revenue):

• Due diligence cost: $5,000-15,000
• Typical lifespan: 2-3 weeks

Mid-market ($5-50M revenue):

• Due diligence cost: $15,000-50,000
• Typical lifespan: 3-6 weeks

Enterprise ($50M+ revenue):

• Due diligence cost: $50,000-150,000+
• Typical lifespan: 6-12 weeks

Compare to cost of discovering problems post-acquisition (often 2-5x higher).

Red Flags That Kill Deals

Certain findings should reconsider the acquisition:

• Business-critical system dependent on one person who won't stay
• Major security breach with no remediation
• Significant unlicensed software creating liability
• Systems can't scale to required growth
• Compliance violation with major fines
• Data integrity issues affecting customer trust
• Vendor relationships terminating post-acquisition
• Hidden technical debt requiring replacement of major systems

Any of these warrant renegotiating price, extending transition timeline, or reconsidering the deal.

What We Recommend

If you're acquiring a business, technology due diligence is non-negotiable.

We've conducted tech assessments for dozens of acquisitions, identifying major issues, saving millions in unexpected costs, and informing acquisition decisions.

Whether you're the buyer or seller, having an independent assessment helps.

Buyers: De-risk the acquisition and negotiate informed terms. Sellers: Show serious buyers your technology is sound and increase valuation.

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Ready to Get Technology Due Diligence Right?

Whether you're evaluating an acquisition or preparing a business for sale, technology assessment is critical. Getting it right prevents expensive post-acquisition surprises and ensures successful integration.

We can conduct comprehensive technology assessments, provide findings, and help navigate the implications for your acquisition or transition.

Schedule a consultation to discuss your technology due diligence needs. We'll outline the assessment scope, timeline, and deliverables specific to your situation.

Call us at (804) 510-9224 or email info@sandbarsys.com.

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Sandbar Systems conducts technology due diligence for businesses, investors, and acquirers. We help identify risks, assess integration needs, and ensure technology considerations are properly evaluated in M&A situations.