Scoping Tech Due Diligence: adapting to deal structures and context 

Understanding the scope of Technology Due Diligence

Tech Due Diligence aims to evaluate various aspects of a company's technology stack, software architecture, security, scalability, and compliance with intellectual property (IP) and licensing requirements. However, the emphasis on each aspect depends on:

• The deal structure (e.g., full acquisition vs. partial investment)
• The target company's role within the larger transaction (e.g., standalone entity vs. integrated subsidiary)
• The buyer’s strategy (e.g., scaling, restructuring, or integrating into an existing portfolio)

Defining the scope of Technical Due Diligence early in the process is important for both efficiency and effectiveness. A well-scoped Tech Due Diligence engagement should consider the appropriate depth versus breadth, as the level of detail required varies by transaction type. A broad overview may suffice for minority investments, while full acquisitions demand deep dives into architecture, security, and operational resilience. Technical risk tolerance also plays a role, as some investors may accept minor technical risks if the business opportunity outweighs them, while others require comprehensive audits to mitigate risks.

The composition of the due diligence team is another important factor. The expertise required should match the complexity of the technology. For example, AI-driven platforms may require specialists in machine learning and data science, while SaaS businesses may need cloud infrastructure experts. Regulatory and compliance needs should also be assessed, as industry-specific obligations such as GDPR, HIPAA, or SOC 2 may be important areas of focus. Additionally, transition and integration planning are essential, particularly in carve-outs and strategic acquisitions, where Technical Due Diligence should address the challenges of migration and integration to ensure seamless post-deal execution.

A tailored approach ensures that the assessment is aligned with the transaction’s strategic goals, reducing unnecessary effort while addressing key risks effectively.

Different deal structures and their impact on Tech Due Diligence

Carve-outs

A carve-out involves separating a business unit or subsidiary from its parent company. These transactions often require a detailed assessment of how independent the carved-out entity is from its former parent, particularly regarding IT infrastructure, software licenses, and data repositories. Key considerations include:

• Technology independence: evaluating the level of reliance on the parent company’s IT infrastructure, software licenses, and data repositories.
• IP ownership and licensing: ensuring clarity on the ownership of software and technology assets that may have been shared within the parent company.
• Operational readiness: identifying gaps in IT operations, cybersecurity, and compliance that need to be addressed post-transaction.
• Third-party dependencies: assessing whether existing vendor contracts and cloud services can be transferred or require renegotiation.

Management Buyouts (MBOs)

In an MBO, the management team takes ownership of the company, requiring a thorough evaluation of its existing technology stack and infrastructure. A major consideration is technical debt—legacy systems may present challenges to future scalability and efficiency. The due diligence process must also align the technology roadmap with the management team’s vision for the company’s growth. In this context, Tech Due Diligence must focus on:

• Existing tech debt: understanding the current state of the technology stack and whether legacy systems present risks to future scalability.
• Product roadmap alignment: assessing whether the technology direction aligns with the management team’s long-term vision.
• Key personnel retention: identifying critical engineering, DevOps, and security personnel whose expertise is necessary for continuity.
• Funding constraints: ensuring that any required technology upgrades or compliance measures are feasible within budget constraints.

Private Equity growth investments

For private equity investors considering a minority or majority stake, the focus of Technical Due Diligence shifts toward scalability and maintainability. The ability of the technology platform to support projected business growth is a key determinant of investment success. The Technology Due Diligence scope often includes:

• Scalability and maintainability: evaluating whether the technology is robust enough to support projected growth.
• Security and compliance: assessing vulnerabilities, especially in data handling and regulatory compliance (GDPR, SOC 2, etc.).
• Open Source Software (OSS) risks: identifying potential OSS licensing pitfalls that could impact commercial viability.
• Technical differentiation: understanding the competitive edge of the technology compared to market alternatives.

Strategic acquisitions

Strategic acquisitions are often pursued to expand a company’s technology portfolio. As such, Technical Due Diligence must evaluate how well the target company’s technology integrates with the acquiring entity’s existing stack. Key focus areas include:

• Architectural compatibility: ensuring seamless integration with existing tech stacks and APIs.
• Code quality and documentation: reviewing code maintainability, technical debt, and adherence to best practices.
• Talent evaluation: assessing whether the engineering team’s expertise complements the acquiring company's existing capabilities.
• Cybersecurity and compliance risks: identifying potential data security risks that could affect post-merger operations.

Tailoring Technical Due Diligence based on key risks and objectives

While Technology Due Diligence varies by deal structure, some universal principles apply.

Define key risks early

This step is essential to align the scope with investor concerns, such as scalability, security, and IP clarity. A modular approach can be useful, breaking down due diligence into adaptable components based on deal-specific priorities.

Focus on business impact

This approach will ensure that technical deep dives are justified by their effect on valuation, risk, or integration feasibility. Leveraging automated tools like code scanning, security audits, and IP reviews can improve efficiency and accuracy.

Take a structured approach

To further refine Tech Due Diligence based on risk and objectives, a structured approach should be taken. Risk quantification allows for assigning numerical scores to different technical domains, helping to prioritize focus areas based on business impact. Competitive benchmarking is valuable for assessing a company's technology maturity, security posture, and scalability in comparison to industry standards. Conducting a cost-benefit analysis of technical risks helps determine whether identified risks justify renegotiation of deal terms, additional investment in remediation, or reconsideration of the transaction altogether.

Ensure integration strategy alignment

Technical assessments must correspond with post-acquisition integration plans to minimize disruption and optimize synergies. By following these structured refinements, Technical Due Diligence can be more effective in supporting informed investment and acquisition decisions.

Conclusion

Scoping Technology Due Diligence effectively requires a deep understanding of the transaction structure and investment thesis. Whether dealing with a carve-out, an MBO, or a strategic acquisition, the due diligence process must be flexible and focused on the specific risks and opportunities relevant to each case. Vaultinum brings together a range of experts with deep experience in these types of transactions, offering both in-house and on-call specialists familiar with the technical and business implications of each deal structure. Additionally, Vaultinum provides advanced tools that analyze security, licensing, human capital, and network footprinting, offering a comprehensive view of the technology landscape. By leveraging this expertise and technology, investors and acquirers can make informed decisions that align with their strategic goals while mitigating technical risks.

Disclaimer

The opinions, presentations, figures and estimates set forth on the website including in the blog are for informational purposes only and should not be construed as legal advice. For legal advice you should contact a legal professional in your jurisdiction.

The use of any content on this website, including in this blog, for any commercial purposes, including resale, is prohibited, unless permission is first obtained from Vaultinum. Request for permission should state the purpose and the extent of the reproduction. For non-commercial purposes, all material in this publication may be freely quoted or reprinted, but acknowledgement is required, together with a link to this website.