Technical Due Diligence in Acquisitions: What the Code Reveals About the Company

Technical due diligence assesses, prior to signing, what is contained in a target company’s code, what risks it poses, and what a takeover is actually worth from a technical perspective. Anyone who buys a company also buys its software, whether or not that is factored into the purchase price. According to the Bain Global M&A Report, over 70 percent of transactions in the mid-market segment have a significant technology component, such as Plausity citing the report (Plausity, March 2026). A purchase price based on an overly superficial review can rarely be corrected retroactively after the deal is signed.

What a Technical Due Diligence Review Specifically Examines

An audit consisting solely of interviews with the development team reveals only a fraction of the relevant risks. It must go beyond interviews and examine the code itself, the security posture, and the origin of the intellectual property, because in practice, statements made during interviews often do not match the actual state of the systems. Those who rely on management presentations rarely identify the areas of the system that will later cost the most during the acquisition. Only those who examine the code themselves—rather than relying on a summary—can identify precisely these areas.

These six areas are interrelated; a weakness in one area usually exacerbates the risks in the others. If documentation is lacking, the key-person risk becomes more significant. If test coverage is lacking, any further development of the architecture becomes riskier than it appears on paper.

When it comes to the origin of intellectual property, it’s worth taking a close look at the contracts. According to § 69b of the German Copyright Act (UrhG) Unless otherwise agreed, the employer holds the property rights to software created by employees in the course of their duties. This rule does not apply to freelancers. In such cases, an explicit transfer of rights must be stipulated in the contract—and this is precisely what is often missing in codebases that have evolved over the years.

In the audits we conduct, a pattern emerges time and again. Systems with good test coverage almost always have clearer documentation as well, because both stem from the same work discipline within the development team. If both are lacking at the same time, that is a stronger warning sign than either metric on its own.

Why Technical Debt Affects the Purchase Price

Technical debt can be measured as a metric, unlike the vague impression gained from a single conversation. Outdated dependencies, missing tests, and an architecture that makes every change a risk result in real follow-up costs after the purchase—whether through rework, delayed further development, or a higher risk of failure during ongoing operations. These costs directly impact the transaction’s return on investment, regardless of how well the business model itself performs.

Quantifying these liabilities is therefore not merely an academic exercise. It provides the basis for purchase price negotiations and for a realistic „first 100 days plan“ following the acquisition, during which the most urgent risks must be addressed before they lead to outages or security incidents. An amount in the purchase agreement based on this figure is easier to justify to a committee than a blanket discount based on gut feeling.

In practice, the amount identified is usually incorporated into the transaction in one of two ways. Either the purchase price is reduced by the estimated follow-up costs, or a portion of the purchase price is held in escrow until the most critical issues have been resolved. Which approach is appropriate depends on the bargaining power of both sides, not solely on the amount of the identified debts. This article illustrates just how costly such remedial work can be. ERP Projects in Crisis: Typical Patterns and Solutions.

Frequently Asked Questions

How long does a technical due diligence take?

For an initial, reliable overview, one to two weeks is often sufficient with a small team that has access to the code, the ticket system, and the key contacts. Larger transactions involving multiple product lines or distributed teams take correspondingly longer, especially if access needs to be arranged before the actual review can begin. Setting a fixed timeframe at the outset helps both sides because it prevents the audit from dragging on unnoticed for weeks and delaying the entire transaction process.

What are some typical exclusion criteria?

These include unclear ownership of the code—for example, when significant portions were developed by freelancers without a documented transfer of rights—serious security vulnerabilities in production systems, and an architecture that can only be further developed by effectively rebuilding the system from scratch. None of these criteria automatically precludes a transaction, but they do significantly affect the purchase price or the structure of the deal—for example, through a longer liability period for the seller or a portion of the purchase price being withheld.

Who should conduct the review?

A team with real development experience delivers different results than consultants who have never been responsible for writing productive code themselves. Ideally, the people who will be responsible for addressing the identified risks after the acquisition should be involved as early as the audit phase; this significantly shortens the transition from assessment to actual integration. In practice, an audit report that does not include responsibility for implementation often ends up in a drawer rather than leading to concrete actions.

Technical due diligence is only as valuable as the ability to subsequently address the risks identified. torck evaluates target companies using the same development teams from Maxhütte-Haidhof, Vienna, and Rabat, who then Technical Integration as an Interim Assignment can take over the process, rather than simply handing over the results in a report. The contract partner for the audit is the German company torck GmbH, which facilitates confidentiality during an ongoing transaction. Anyone who needs a technical assessment prior to an acquisition can do so in a Initial Consultation .

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