Technology risk identification is the systematic process of discovering, documenting, and categorizing risks that could impact deal value or post-acquisition operations. The goal isn't to find every possible issue—it's to identify material risks that affect the investment thesis.
The Risk Identification Process
Effective risk identification uses multiple methods in parallel:
| Method | What It Finds | Best For |
|---|
| Document Review | Documented gaps, policy issues | Governance, compliance risks |
| Code Analysis | Quality issues, vulnerabilities | Technical debt, security risks |
| Management Interviews | Known issues, strategic risks | Context, priorities, culture |
| Technical Deep Dives | Architecture issues, hidden debt | Scalability, complexity |
| Team Interviews | Operational challenges, morale | Key person risk, culture |
Risk Categories and Examples
1. Technical Risks
| Risk | Example Finding | Potential Impact |
|---|
| Code quality | 35% test coverage, high complexity | Slow development, bugs, attrition |
| Architecture limits | Single-threaded processing bottleneck | Scalability ceiling |
| Technology obsolescence | Core system on Python 2.7 | Security risk, talent scarcity |
| Integration complexity | 40+ point-to-point integrations | Fragile, expensive to maintain |
| Performance issues | Database queries taking 30+ seconds | Customer experience, churn |
2. Security Risks
| Risk | Example Finding | Potential Impact |
|---|
| Vulnerabilities | 15 critical CVEs in production | Breach, regulatory fines |
| Compliance gaps | No SOC 2, customers requiring it | Sales impediment, churn |
| Data exposure | PII in logs, public S3 buckets | Breach, GDPR fines |
| Access control | Shared admin credentials | Insider threat, audit failure |
| Third-party risk | Unvetted SaaS providers with data access | Supply chain breach |
3. Operational Risks
| Risk | Example Finding | Potential Impact |
|---|
| Key person dependency | CTO wrote 60% of core code, no docs | Knowledge loss if leaves |
| Process maturity | No change management, manual deploys | Outages, slow recovery |
| Disaster recovery | Backups never tested | Extended downtime if failure |
| Vendor concentration | Critical dependency on single vendor | Business disruption risk |
| Support capability | No on-call rotation, reactive only | Customer impact, SLA breaches |
4. Strategic Risks
| Risk | Example Finding | Potential Impact |
|---|
| Technology-market fit | Tech built for market that's shifting | Obsolescence, pivot needed |
| Competitive position | Competitors have 2-year tech lead | Catch-up investment needed |
| Innovation capability | All resources on maintenance | Can't build new products |
| Platform lock-in | Deep proprietary service dependency | Switching costs, leverage |
| Talent market | Built on rare tech stack | Hiring difficulty, costs |
Risk Scoring Framework
Likelihood Scale
| Score | Likelihood | Definition |
|---|
| 1 | Rare | <10% chance of occurring |
| 2 | Unlikely | 10-25% chance |
| 3 | Possible | 25-50% chance |
| 4 | Likely | 50-75% chance |
| 5 | Almost Certain | >75% chance |
Impact Scale
| Score | Impact | Financial | Operational |
|---|
| 1 | Negligible | <$50K | Minor inconvenience |
| 2 | Minor | $50K-$250K | Some disruption |
| 3 | Moderate | $250K-$1M | Significant disruption |
| 4 | Major | $1M-$5M | Serious business impact |
| 5 | Critical | >$5M | Threatens business viability |
Risk Score = Likelihood × Impact
| Score Range | Risk Level | Action |
|---|
| 1-4 | Low | Monitor, accept |
| 5-9 | Medium | Address post-close |
| 10-16 | High | Factor into deal terms |
| 17-25 | Critical | Deal breaker or major adjustment |
Common "Hidden" Risks
Risks that are frequently missed in TDD:
- License compliance: Open source copyleft violations can force code rewrites
- IP ownership: Contractor code without proper assignment
- Data quality: Garbage data that undermines AI/analytics claims
- Shadow IT: Critical processes running on unsanctioned tools
- Customer concentration: Technology customized for one large customer
- Acquisition debt: Problems inherited from target's own prior acquisitions
- Off-balance sheet: Technical commitments not in financial DD
Risk Register Template
| Field | Example |
|---|
| Risk ID | TECH-001 |
| Title | Core Platform on End-of-Life Framework |
| Description | Main application built on .NET Framework 4.5, unsupported since 2022 |
| Category | Technical / Obsolescence |
| Likelihood | 5 (Certain - EOL is a fact) |
| Impact | 4 (Major - security risk, talent scarcity) |
| Risk Score | 20 (Critical) |
| Financial Impact | $1.5M - $3M migration cost |
| Mitigation | Plan .NET 6/8 migration; 12-18 month effort |
| Owner | Post-acquisition CTO |
| Timeline | Begin within 90 days of close |
Key Takeaway: Not all risks are equal—focus on material risks that are high-impact AND high-likelihood. A risk that's certain to happen (EOL platform) matters more than a theoretical risk. Prioritize risks that can be quantified and addressed in deal terms, whether through price adjustments, escrows, or representations and warranties.