Private equity firms have become sophisticated technology investors. But many still underweight technical due diligence, leaving value on the table and risk unaddressed. Here's what PE professionals need to know.
When Technology Assessment Matters Most
Technical due diligence is essential when:
- Technology is core to the business model (SaaS, tech-enabled services)
- Significant technology investment is planned post-acquisition
- Integration with portfolio companies is contemplated
- Scalability is central to the investment thesis
- Cybersecurity or compliance risk is elevated
What Technical Due Diligence Delivers
Risk Identification
- Technical debt quantification
- Security and compliance gaps
- Scalability limitations
- Key person dependencies
- Integration complexity
Value Creation Insights
- Technology optimization opportunities
- Cost reduction potential (infrastructure, operations)
- Product development acceleration
- Integration synergy identification
Deal Support
- Purchase price adjustment justification
- Escrow and holdback structuring
- Representation and warranty support
- Integration planning input
Engaging Technical Due Diligence
Timing
- Early (exploratory): High-level technology assessment with limited access
- Confirmatory: Deep dive with full data room and management access
- Pre-close: Specific issue investigation if concerns arise
Scope Decisions
- Rapid assessment (1-2 weeks): Top risks and deal-breakers
- Standard assessment (2-4 weeks): Comprehensive evaluation
- Deep dive (4+ weeks): Extended scope for complex targets
Using Technical Findings
Valuation Impact
Translate findings to financial terms:
- Remediation costs = purchase price adjustment basis
- Scalability issues = growth projection revisions
- Security gaps = risk-adjusted valuation
Deal Structuring
- Escrow holdbacks for identified remediation needs
- Earnout adjustments for technology-dependent milestones
- Representation coverage for technical representations
Value Creation Planning
- 100-day technology priorities
- Capex requirements for technology improvements
- Talent needs for technology execution
Common PE Mistakes
- Skipping technical diligence: "It's just software, how hard can it be?"
- Wrong expertise: Using generalist consultants for specialized technology
- Too late: Engaging after deal terms are set
- Too shallow: Checklist compliance vs. substantive assessment
- Ignoring findings: Proceeding despite material issues
Key Takeaway: Technical due diligence is an investment, not a cost. For technology-intensive targets, thorough assessment typically returns 5-10x in avoided costs and negotiated savings. The question isn't whether to do it, but how to do it well.