What Buyers Look for in Tech M&A Due Diligence

Laila Archer, CIPP/US

Privacy Law Attorney

January 20, 2025

Technology company acquisitions involve unique complexities that distinguish them from traditional M&A transactions. When evaluating a potential tech acquisition, buyers conduct exhaustive due diligence examining everything from source code to customer contracts, security practices to regulatory compliance. Understanding what buyers scrutinize and why can help sellers prepare effectively and buyers avoid costly mistakes. This guide explores the key areas of tech M&A due diligence from both perspectives.

The Purpose and Scope of Due Diligence

Due diligence serves multiple critical functions in technology acquisitions. It verifies that the target company's representations are accurate, identifies risks that might affect valuation or deal structure, confirms that key assets actually exist and are owned by the company, reveals potential liabilities or obligations, and informs integration planning.

For technology companies, due diligence extends beyond traditional financial and legal review to include technical assessments of code quality, architecture, security, and scalability. The process typically intensifies after a letter of intent is signed but should begin earlier during preliminary discussions, especially for strategic buyers with specific integration requirements.

Intellectual Property Deep Dive

Intellectual property represents the crown jewel of most tech acquisitions, making IP due diligence perhaps the most critical component of the process.

Ownership Verification

Buyers will meticulously verify that the company actually owns its core technology. This requires examining IP assignment agreements from founders, employees, contractors, and consultants who contributed to product development. Missing assignments represent serious red flags that can derail transactions or significantly reduce purchase price.

Particular scrutiny applies to pre-incorporation work by founders, development by contractors or offshore teams, and contributions by employees who left the company. Buyers want clean chains of title for all IP, documented through written agreements executed contemporaneously with the work performed.

Third-Party Dependencies

Buyers examine all third-party code, libraries, APIs, and other IP incorporated in the product to understand dependencies and license compliance. Open source software receives special attention, as certain licenses can create obligations or restrictions that concern buyers.

Due diligence will identify every open source component, the license governing each component, whether the company has complied with license terms, and whether any copyleft licenses might affect proprietary code. Companies using open source software under GPL, AGPL, or other copyleft licenses should be prepared to explain their compliance and address buyer concerns about license obligations.

Patent Portfolio and Strategy

For companies with patents, buyers evaluate the patent portfolio's strength, scope, and strategic value. This includes reviewing patent applications and issued patents, assessing coverage of current and future products, evaluating potential offensive and defensive value, and identifying any ongoing patent litigation or disputes.

Infringement Risks

Buyers assess the risk that the target company's technology infringes third-party IP rights. This involves searching for similar patents that might cover the technology, reviewing any cease and desist letters or infringement claims, and evaluating the company's freedom to operate in its markets.

Technology and Product Assessment

Beyond IP ownership, buyers want to understand the technology's quality, architecture, and scalability.

Code Review

Technical due diligence typically includes code review to assess quality, maintainability, and technical debt. Buyers evaluate code organization and documentation, adherence to best practices and coding standards, test coverage and quality assurance processes, scalability of architecture, and security practices and vulnerability management.

For larger acquisitions, buyers may engage third-party firms to conduct comprehensive code audits, security assessments, and architecture reviews.

Technology Stack

Buyers examine the entire technology stack to understand dependencies, assess integration requirements, and identify risks. This includes evaluating programming languages and frameworks, databases and data storage systems, cloud infrastructure and hosting, third-party services and APIs, and development and deployment tools.

Strategic buyers particularly focus on compatibility with their existing technology stack and potential integration challenges or opportunities.

Product Roadmap

Understanding the product roadmap helps buyers assess future potential and required investment. Due diligence explores planned features and functionality, technical initiatives required for scalability, known bugs and technical debt, and customer-requested enhancements.

Customer and Revenue Analysis

For SaaS and subscription-based businesses, customer contracts and revenue quality receive intense scrutiny.

Customer Contracts

Buyers review customer agreements to understand terms, obligations, and risks. Key focus areas include contract term lengths and renewal rates, pricing and discount structures, service level agreements and performance obligations, liability and indemnification provisions, termination rights and change of control clauses, and any non-standard or unusual terms in large customer agreements.

Revenue Quality

Buyers analyze revenue composition and sustainability through metrics including monthly recurring revenue and growth trends, customer acquisition costs and lifetime value, churn rates by customer segment, revenue concentration among top customers, and payment terms and collection history.

Customer Satisfaction

Due diligence often includes assessing customer satisfaction through Net Promoter Scores or satisfaction surveys, support ticket volume and resolution metrics, customer references and interviews, renewal rates and expansion revenue, and any significant customer complaints or disputes.

Security and Compliance

In today's environment, security and compliance due diligence can make or break tech acquisitions.

Information Security Program

Buyers thoroughly evaluate security practices and controls, examining security policies and procedures, access controls and authentication mechanisms, encryption standards for data at rest and in transit, network security and intrusion detection, vulnerability management and patch processes, backup and disaster recovery capabilities, and security training for employees.

Companies with SOC 2 reports, ISO 27001 certification, or recent penetration test results demonstrating strong security posture have a significant advantage.

Security Incidents

Any history of security incidents or data breaches receives careful attention. Buyers want to understand what incidents have occurred, how the company responded, what remediation measures were implemented, whether proper notifications were made, and whether any regulatory actions or customer claims resulted.

While security incidents raise concerns, demonstrating effective response and meaningful remediation can actually build buyer confidence in your security program maturity.

Privacy and Data Protection

Privacy compliance has become a critical due diligence area, particularly for companies handling consumer data or operating in regulated industries. Buyers examine privacy policies and practices, compliance with applicable privacy laws like CCPA, GDPR, or sector-specific requirements, data processing agreements with customers and vendors, data mapping and inventory documentation, mechanisms for handling data subject rights requests, and any privacy-related complaints, investigations, or enforcement actions.

Regulatory Compliance

Industry-specific regulatory compliance receives focused attention. Healthcare technology companies must document HIPAA compliance comprehensively. Financial technology companies face scrutiny around GLBA compliance, money transmitter licensing, and financial services regulations. Companies with government customers must address FedRAMP, FTC regulations, or other government requirements.

Financial Due Diligence

While financial advisors typically lead this area, certain aspects have particular importance in tech M&A.

Revenue Recognition

SaaS revenue recognition can be complex, especially with multi-year contracts, professional services components, or variable consideration. Buyers verify that revenue recognition policies comply with ASC 606 and assess the impact of any required changes on historical financials.

Financial Projections

Buyers critically evaluate financial projections and the assumptions underlying them, including revenue growth assumptions and drivers, customer acquisition and retention assumptions, operating expense projections, required capital expenditures, and working capital requirements.

Capitalized Development Costs

If the company has capitalized software development costs, buyers examine the accounting treatment to ensure it complies with GAAP and assess whether capitalized costs should have been expensed.

People and Organization

Technology companies are fundamentally people businesses, making human capital due diligence essential.

Key Employees

Buyers identify key technical, product, and sales personnel critical to ongoing operations and assess retention risks. This includes evaluating employment agreements and retention mechanisms, equity vesting schedules and acceleration provisions, any retention concerns or flight risks, and succession planning for critical roles.

Company Culture

Cultural compatibility matters, particularly in strategic acquisitions where integration is planned. Buyers may assess culture through employee interviews, review of engagement surveys, turnover rates and exit interview themes, and evaluation of values and operating principles.

Employment Issues

Any employment-related problems require disclosure and assessment, including pending or threatened employment litigation, discrimination or harassment complaints, wage and hour compliance issues, independent contractor classification risks, and labor organizing activities or union relationships.

Litigation and Disputes

Buyers need complete visibility into legal risks and disputes. Due diligence covers pending litigation and arbitrations, threatened claims or demand letters, regulatory investigations or enforcement actions, warranty claims or customer disputes, and IP infringement allegations or licensing disputes.

Even matters the seller believes are meritless require disclosure, as buyers will discover them through their own searches and litigation checks.

Transaction Structure Considerations

Due diligence findings inform transaction structure decisions. Material issues might lead to price adjustments, escrow provisions for specific risks, representations and warranties insurance, earnout provisions linking payment to performance, or specific indemnification provisions for identified risks.

In some cases, significant problems discovered during due diligence result in transaction termination. However, many issues can be addressed through appropriate pricing, structure, and risk allocation mechanisms.

Preparing for Due Diligence

For sellers, the best approach is conducting your own due diligence before going to market. Identify and address issues proactively, organize documentation thoroughly, and be prepared to discuss problems candidly with appropriate context.

For buyers, assembling a qualified due diligence team is essential. This typically includes legal counsel experienced in tech M&A, financial advisors or accountants, technical experts for code and architecture review, security specialists for cybersecurity assessment, and industry experts for market and competitive analysis.

The Value of Thorough Due Diligence

While due diligence can feel exhaustive and invasive, it serves important purposes for both parties. Sellers benefit from identifying and addressing issues before they derail negotiations. Buyers gain confidence in their investment and avoid costly surprises after closing.

Understanding what buyers examine and why enables sellers to prepare effectively and buyers to conduct efficient, thorough assessments. In technology M&A, where IP, customer relationships, and technical capabilities drive value, comprehensive due diligence is not optional but essential for successful transactions.