When preparing for a technical due diligence (TDD), companies often want to emphasize their strengths and paint the best possible picture for potential buyers or investors. We see companies fall into the trap often. Unfortunately, one of the most detrimental mistakes they can make is attempting to hide deficiencies in the architecture and not being prepared to discuss how technical debt will be addressed. This lack of transparency and unpreparedness can cause more damage to the deal than the issues themselves.
Why Hiding Technical Debt Is Detrimental To Diligence
Every technology company accumulates technical debt over time. It’s a natural byproduct of scaling quickly, introducing new features, or lacking the time and resources to refactor codebases. Technical debt, in itself, is rarely a deal-breaker. What truly raises red flags is when a company attempts to minimize, obscure, or outright hide these deficiencies, thinking that it will prevent concern or scrutiny.
Potential buyers, investors, and technical due diligence teams, like AKF Partners, are well aware that no system is perfect. They expect to encounter issues such as inadequately scaled architecture, outdated code, limited automation, performance bottlenecks, or suboptimal architectural decisions. What they’re really looking for is evidence that the company has a deep understanding of these issues and a clear plan for addressing them. In addition, they want to understand how tradeoffs and decisions were made in the past. A team that is able to make deliberate tradeoff decisions while tracking its debt is a sign of strength and skill.
The Impact of Trying to Hide Deficiencies
Trying to sweep technical debt and other architectural shortcomings under the rug almost always backfires. Here’s why:
- Creates Distrust:
Transparency is crucial during the due diligence process. If a company attempts to hide deficiencies, it sends a message that there may be other, more serious issues lurking beneath the surface. This erodes trust and can cause investors or acquirers to back out of the deal entirely.
2. Exposes the Company to Extended Diligence:
When a company is evasive or defensive about known technical challenges, it often prompts the due diligence team to validate topic areas that are left unaddressed by running code scans or requiring additional live diligence sessions to confirm findings. They may bring in more specialized experts, extend the evaluation timeline, or require more documentation. This increased scrutiny can extend the timeline of diligence.
3. Signals Poor Planning and Execution:
The lack of a clear remediation plan suggests that the company either lacks the strategic foresight to prioritize technical debt or doesn’t have the technical leadership to execute complex refactoring projects. This is a significant concern for any buyer or investor looking for sustainable growth and scalability.
Why Discussing Remediation Plans is Key
Investors and acquirers are not just interested in the current state of your technology; they want to understand your future plans. They know that any investment will come with a degree of risk and that a portion of their capital may need to be allocated to addressing technical shortcomings. What they need to see is that:
- You Have a Clear Roadmap: Presenting a structured, time-bound plan to remediate technical debt demonstrates that you are proactively managing risks. It shows that your company can balance new feature development with the necessary refactoring and optimization efforts.
- You Can Allocate Resources Effectively: A good remediation plan outlines the necessary resources—time, people, and budget—that will be required to address the deficiencies. This allows buyers to understand what the true cost of ownership will be post-acquisition.
- You Prioritize Critical Issues: Buyers want to know that you are not just aware of issues, but that you can also prioritize which deficiencies need immediate attention and which can be deferred. This ability to distinguish between “must-fix” and “nice-to-fix” issues is crucial for operational efficiency and strategic planning.
Creating a Strong Remediation Plan
Ideally tech debt is already accounted for and is incorporated into the software development pipeline. This isn’t always the case with many of our clients. Here are a few best practices to ensure that your tech debt remediation plans and are compelling and credible:
- Conduct a Comprehensive Technical Audit: Before engaging with potential buyers or investors, conduct a thorough internal audit to identify all areas of technical debt, security vulnerabilities, and process inefficiencies. Document the potential impact of each issue.
- Establish a Prioritization Framework: Not all technical debt is created equal. Categorize issues based on their impact on scalability, security, performance, and business operations. Focus on the areas that pose the greatest risk to growth or stability.
- Create a Realistic Timeline: Outline when and how you plan to address each deficiency. Make sure the timeline is achievable given your team’s current capacity and workload. Buyers will be wary if your timeline is overly optimistic or doesn’t align with your current operational bandwidth.
- Assign Ownership: Define who will be responsible for each remediation effort. Having clear ownership for each item on the roadmap demonstrates accountability and ensures that remediation efforts are not sidelined by day-to-day operations.
- Communicate Short-Term and Long-Term Plans: While short-term fixes are important, it’s equally critical to discuss how the architecture will evolve over time. Buyers want to see that you have a vision for long-term scalability and that your remediation efforts are part of a broader strategy.
Turning a Potential Weakness into a Strength
Having technical debt and architectural deficiencies is common, but being able to articulate a clear path forward is a sign of strong leadership and technical maturity. A well-thought-out remediation plan can turn what initially appears to be a weakness into a strength by demonstrating that your company is:
• Self-aware and able to critically evaluate its own technology stack.
• Proactive in mitigating risks before they become major issues.
• Strategic in resource allocation and long-term planning.
Key Takeaways
1. Don’t Hide It: Attempting to hide technical debt and deficiencies is one of the biggest mistakes you can make during technical due diligence.
2. Be Transparent: Investors and acquirers expect some level of technical debt. They’re more concerned if you’re unaware or unprepared to deal with it.
3. Have a Plan: Demonstrating a clear, actionable remediation plan for addressing deficiencies shows that your company is committed to sustainable growth and scalability.
For more insights on technical debt and preparing for technical due diligence, visit AKF Partners’ Blog.
By being transparent and prepared, you not only build confidence with potential investors but also position your company as one that values continuous improvement, operational excellence and one that understands how to use technical debt as an advantage in making optimal decisions when innovating. This is what great software product companies exhibit.