How to Approach Technical Due Diligence

Key Areas of Technical Due Diligence for Private Equity in Software Companies

When evaluating a software company, private equity firms must assess its technical infrastructure, scalability, and long-term sustainability to identify risks and investment potential. A thorough review should focus on these four key areas:

1. Architecture & Scalability

   A modern, modular architecture enables growth without costly rewrites. Look for cloud-native infrastructure, API-driven design, and microservices that allow seamless scaling. Avoid monolithic systems that hinder flexibility and lead to high technical debt.

2. Code Quality, Security & Compliance

   The codebase should be clean, maintainable, and well-documented, following best practices such as code reviews, automated testing, and CI/CD pipelines. Security should align with SOC 2, ISO 27001, and GDPR standards, ensuring data protection, encryption, and regular audits. Companies with weak security postures or unresolved breaches present significant risks.

3. Development Process & Team Strength

   A well-structured engineering team with strong technical leadership, a balance of senior and junior developers, and agile workflows (Scrum, Kanban) ensures efficient product development. Knowledge-sharing and minimal reliance on key individuals reduce operational risk.

4. Technology Stack & Product Roadmap
   The tech stack should be modern, widely adopted, and scalable, avoiding outdated or proprietary technologies that limit flexibility. The product roadmap should demonstrate clear innovation plans while maintaining maintainability, ensuring that feature expansion does not create unnecessary complexity.

By focusing on these four pillars, private equity firms can identify technical risks, assess scalability, and ensure the company's technology aligns with long-term growth strategies.

Red Flags to Watch For

• Neglected Technical Debt – Outdated systems, poorly maintained code, and a lack of refactoring can create long-term scalability issues, increasing costs and slowing innovation.

• Insufficient Testing – A weak testing framework results in frequent bugs, degraded performance, and an unreliable user experience, making it harder to maintain product quality.

• Key-Person Risk – When critical knowledge is concentrated among a few individuals, losing them can disrupt operations and delay development.

• Feature Bloat – Excessive customization to satisfy every customer request can add complexity, making the system harder to maintain, increasing development time, and leading to inconsistent user experiences.