Today, technology drives most companies’ operations and creates much of their value. Before investing, acquiring, or partnering, it’s essential to understand a company’s technical health. Technical due diligence does exactly that. It is a detailed review of a company’s technology, infrastructure, processes, and team.

Technical due diligence gives decision makers a clear view of the target company. It helps spot potential risks, ensure the technology supports business goals, and prevent costly mistakes. The process ends with a detailed due diligence report that guides negotiations, investment choices, and integration plans.

In this article, we will answer key questions such as: What is technical due diligence? Why is it important? When should it be performed? What does a typical checklist look like? By the end, you’ll have a clear understanding of how technical due diligence works and how it can support better business decisions.

Technical due diligence: meaning and scope

Technical due diligence (TDD), sometimes called technology due diligence, is the process of evaluating the technical aspects of a business to identify risks, assess capabilities, and verify claims made by the company. 

While often associated with mergers and acquisitions, it also supports venture capital or private equity investments, strategic partnerships, and even vendor selection. TDD is often conducted alongside operational due diligence, which focuses on non-technical aspects such as processes, organizational efficiency, and business operations, to provide a complete picture of the company’s health.

Technical due diligence covers areas such as:

  • Software architecture and system design
  • Code quality and technical debt
  • Infrastructure and cloud setup
  • Security, compliance, and data privacy
  • DevOps, CI/CD, and release management
  • System performance, scalability, and reliability
  • Team structure and processes
  • Intellectual property and licensing
  • Third-party integrations and APIs

From a buyer’s perspective, technical due diligence aims to identify risks, quantify potential liabilities, and assess scalability. Buyers typically receive a technical due diligence report highlighting key findings, red flags, and recommendations.

From a seller’s perspective, the process is about preparing evidence, demonstrating stability, and facilitating an efficient diligence process. Sellers may also use findings to mitigate risks proactively and strengthen negotiation positions.

When to perform technical due diligence

Technical due diligence should be performed at key decision points in a company’s lifecycle or transactional processes:

  1. Mergers and acquisitions (M&A). Conduct technology due diligence in mergers and acquisitions before finalizing the deal to assess the target company’s technology, infrastructure, and technical team.
  1. VC or PE investments: During the evaluation phase, due diligence is performed to verify that the startup’s technology can support future growth and scaling.
  2. Strategic partnerships and vendor selection: Conducted before signing agreements to ensure system compatibility, security, and operational reliability.
  1. Pre-IPO readiness assessments. To identify gaps in technology, cybersecurity, and technical processes, allowing the company to address issues before going public.

Objectives and outcomes

The primary goal of technical due diligence is risk management. It helps identify potential risks and estimate their impact on the business. However, there are additional benefits and outcomes:

  • Valuation impact. Technical due diligence identifies vulnerabilities that could affect company valuation or transaction terms.
  • Integration fit and operational readiness. It evaluates how well the target’s technology and processes will integrate with the acquirer’s systems.
  • Cost-to-fix estimates and negotiation levers. It highlights areas requiring investment or remediation and provides decision makers with actionable insights.

By the end of the tech due diligence process, companies receive a comprehensive report detailing the entire process, findings, and recommendations for risk mitigation.

Steps for sellers to ensure smooth due diligence

Preparation is essential for a smooth technical due diligence process. Sellers who organize their technology and gather the right evidence are more likely to avoid costly mistakes and get better results.

  1. Build and organize a secure data room. Use a trusted VDR provider to safely store and share relevant documentation with potential investors or acquirers. You can compare the best providers to find one that fits your needs for security, features, and ease of use.
  2. Set up a safe test version of your system. This lets reviewers see how it works without affecting real users or data.
  1. Collect metrics and evidence. Include performance metrics, DORA metrics, service-level objectives (SLOs), test coverage, and other quantitative measures.
  2. List technical debt and known issues. Keep a record of each problem, note how serious it is, and explain how you plan to address or fix it. This helps reviewers understand potential risks and your mitigation strategy.
  1. Assign roles and prepare key team members. Make sure your experts know what technical due diligence questions they might be asked and are ready to explain your technology, including any challenging or complex issues.

These steps help project managers and consultants manage a complex process, ensuring nothing is overlooked during the diligence process.

Technical due diligence checklist

A technical due diligence checklist ensures all critical areas are assessed. While each engagement varies, a thorough review usually includes the following. 

1. Technology and architecture

  • System architecture review. Examine the overall design, modularity, and flexibility of core systems.
  • Scalability and performance. Assess whether systems can handle projected growth in users, data, and transactions.
  • Technology stack evaluation. Check the relevance, maturity, and long-term viability of programming languages, frameworks, and tools used.
  • Integration and interoperability. Review APIs, third-party integrations, and potential dependencies.
  • Technical debt analysis. Identify legacy systems, outdated code, or components that may hinder future development.

2. Product and development

  • Product roadmap review. Evaluate alignment with business goals and market needs.
  • Code quality and documentation. Assess maintainability, readability, and adherence to coding standards.
  • Development processes:.Examine methodologies (Agile, Scrum, DevOps), CI/CD practices, and sprint management.
  • Testing and QA. Check automated and manual testing coverage, bug tracking, and defect resolution.
  • Release management. Review deployment frequency, rollback plans, and version control practices.

3. Security and compliance

  • Cybersecurity assessment. Evaluate network security, application security, and incident response protocols.
  • Data privacy and compliance. Check adherence to GDPR, HIPAA, CCPA, or other applicable regulations.
  • Access control and authentication. Review role-based access, multi-factor authentication, and password policies.
  • Encryption and data protection. Assess data-at-rest and data-in-transit encryption methods.
  • Security history. Examine previous breaches, vulnerabilities, or security audits.

4. Infrastructure and operations

  • Hosting and cloud setup. Evaluate on-premise or cloud infrastructure, redundancy, and resilience.
  • Performance monitoring. Check uptime, load balancing, and alerting systems.
  • Disaster recovery and backups. Assess backup frequency, restoration procedures, and business continuity plans.
  • IT asset management. Review software licenses, hardware inventory, and vendor contracts.

5. Technical team and capabilities

  • Team structure and roles. Assess technical leadership, team composition, and responsibilities.
  • Skill evaluation. Review experience, technical certifications, and expertise areas.
  • Retention and succession. Check turnover rates, hiring practices, and knowledge transfer processes.
  • Leadership and decision-making. Evaluate technical decision-making and strategic planning capabilities.

6. Intellectual property

  • Ownership verification. Ensure the company owns code, patents, trademarks, and other IP assets.
  • Open-source compliance. Check licensing, usage, and potential legal risks.
  • IP disputes. Identify ongoing or past intellectual property conflicts.

7. Data management and analytics

  • Data architecture. Review data models, databases, and storage solutions.
  • Data quality and governance. Assess accuracy, completeness, and consistency of data.
  • Reporting and analytics. Check BI tools, dashboards, and analytics capabilities for decision-making.

8. DevOps, monitoring, and maintenance

  • Deployment pipelines. Review CI/CD tools, automation, and release strategies.
  • System monitoring. Evaluate logging, monitoring, and alerting practices.
  • Maintenance procedures. Check scheduled maintenance, patching, and incident management protocols.

9. Risk assessment and recommendations

  • Identify key risks. Summarize technical, operational, and strategic risks.
  • Impact analysis. Estimate potential effects on business value, operations, and integration.
  • Mitigation strategies. Provide actionable recommendations to reduce or manage identified risks.

Tailoring technical due diligence to your industry

Different industries have unique technical requirements and compliance considerations:

  • Cloud software platforms. Assess code quality, system scalability, multi-client architecture, integration points, and technical debt.
  • Fintech and payments. Evaluate security measures, PCI DSS and AML/KYC compliance, transaction reliability, and data privacy practices.
  • Health technology. Review patient data protection, HIPAA compliance, secure storage and transmission of records, and audit trails.
  • IoT and industrial devices. Examine connected devices, firmware updates, system safety, operational reliability, and remote management capabilities.
  • AI products. Check data rights, model risk, governance, reproducibility of results, and bias mitigation processes.
  • Energy systems. Assess SCADA security, operational resilience, infrastructure reliability, and compliance with industry regulations.

Post-diligence action plan

After the technical due diligence process, findings should be converted into an actionable remediation and integration plan:

  1. Summarize findings. Document all key risks, technology gaps, strengths, and opportunities uncovered during technical due diligence.
  2. Prioritize actions. Rank issues by business impact and urgency, focusing on critical areas such as security vulnerabilities, system performance, scalability, and compliance gaps.
  3. Assign responsibilities. Clearly define owners for each action item, ensuring the right technical teams or external advisors are accountable.
  4. Define timelines and milestones. Set realistic deadlines, intermediate checkpoints, and measurable goals to track progress and maintain momentum.
  5. Develop mitigation and improvement strategies. Create concrete plans to address technical debt, upgrade infrastructure, enhance security, optimize processes, or fill skill gaps.
  6. Align with strategic decisions. Use TDD insights to guide investment approvals, acquisition integration plans, partnership agreements, or operational improvements.
  7. Monitor and review. Establish ongoing monitoring of implemented actions, conduct follow-up assessments, and adjust plans as needed to ensure lasting improvements and risk reduction.

Tip: Using a due diligence data room can help centralize all findings, documents, and updates, making it easier to track progress and share information with stakeholders.

Conclusion

Technical due diligence is a crucial, complex process that goes beyond reviewing code or infrastructure. It provides a thorough assessment of the target company’s technology, operations, and team capabilities. 

By identifying potential risks and aligning technology due diligence with business strategy, investors and acquirers can make informed decisions, avoid costly mistakes, and secure their investments.