Technology Due Diligence - What Buyers Really Evaluate in Your Systems

That enterprise software system you implemented in 2015? The one that “still works fine” and runs your entire operation? A buyer’s technical team will spend significant time dissecting it, cataloging every integration point, security vulnerability, and scalability limitation. What they find may influence your valuation multiple and could affect deal structure, timeline, or whether negotiations proceed smoothly.

Executive Summary

Technology due diligence has grown increasingly important in lower middle market M&A over the past decade, particularly for service-based and technology-enabled businesses. Industry research suggests that most acquirers now conduct formal technology assessments as part of their due diligence process, a significant increase from a decade ago. Many sophisticated buyers today employ structured evaluation frameworks that assess system age, integration quality, security posture, and scalability, revealing operational capabilities and capital requirements that can materially affect both valuation and buyer enthusiasm.

For business owners planning exits in the $2M-$20M revenue range, technology assessment represents both risk and opportunity. Systems that appear functional in daily operations may harbor issues that thorough due diligence will identify. In our firm’s experience advising sellers through transactions, we’ve observed that technology-related adjustments to initial valuations often range from 3-12% of enterprise value, depending on issue severity and remediation requirements, though this varies significantly based on buyer type, industry context, and the specific nature of identified concerns. Conversely, owners who proactively address technology concerns can differentiate their businesses and reduce buyer uncertainty.

This article examines the specific criteria many buyers use during technology due diligence, identifies common system issues that can affect lower middle market transactions, and provides practical self-assessment frameworks for evaluating and addressing technology concerns before entering the market. Understanding the buyer’s perspective on technology assessment enables sellers to anticipate concerns, remediate issues strategically, and position their businesses for stronger transaction outcomes.

Introduction

We’ve witnessed meaningful evolution in how buyers approach technology evaluation over the past decade. What once occupied a few pages in a due diligence checklist now frequently commands dedicated technical consultants and weeks of analysis. This evolution reflects a straightforward reality: technology has become inseparable from operational capability, and operational capability influences sustainable value.

The stakes of technology due diligence extend beyond the obvious question of whether your systems work. Sophisticated acquirers ask deeper questions: Will these systems support the growth we’re projecting in our valuation model? What capital expenditures will we face in the first three years post-acquisition? Does this technology create competitive advantage or merely maintain parity? Are there security or compliance vulnerabilities that create liability exposure?

For lower middle market business owners, technology assessment presents unique challenges. Unlike enterprise transactions with dedicated IT departments and documented system architectures, businesses in the $2M-$20M range often operate with organic technology stacks: systems added incrementally over years, integrated through workarounds, and maintained by personnel who may not remain post-acquisition. This reality doesn’t diminish buyer expectations; it simply means discoveries during due diligence are more likely to surface unexpected issues.

The good news: technology due diligence follows predictable patterns. Buyers tend to use established frameworks, ask consistent questions, and prioritize specific criteria. Owners who understand these evaluation standards can assess their own systems objectively, address remediable issues, and prepare credible narratives for concerns that cannot be fully resolved before going to market. Not all technology issues require remediation; some are better addressed through deal structure, earnout provisions, or post-acquisition integration plans. And for many profitable, well-run businesses, technology issues rarely determine transaction outcomes, they’re one factor among many that buyers evaluate.

The Four Pillars of Technology Due Diligence

Buyers typically organize their technology assessment around four fundamental dimensions. Each pillar carries distinct implications for valuation and transaction structure, and material weakness in any single area can affect deal outcomes. The weight placed on each dimension varies significantly by buyer type: strategic acquirers with strong IT capabilities may view legacy systems as easily remediated, while financial buyers without technical expertise may assign higher risk to the same issues. Similarly, technology-intensive service businesses face more rigorous assessment than traditional manufacturing or distribution companies.

System Age and Technical Debt

The age of your core systems tells buyers a story about your business. Modern, well-maintained technology suggests an organization that invests in operational capability and adapts to changing requirements. Legacy systems, particularly those running on deprecated platforms or unsupported software versions, signal accumulated technical debt that buyers may need to address post-acquisition.

Technical debt encompasses more than just old software. It includes customizations that complicate upgrades, documentation gaps that create key-person dependencies, and architectural decisions that made sense historically but now constrain capability. Buyers typically quantify technical debt in terms of estimated remediation cost and timeline, then factor these requirements into their valuation models or deal structure.

The assessment typically examines your technology stack layer by layer. What operating systems run your servers? When did vendors last update your core applications? Are you running software versions that no longer receive security patches? How many customizations would need to be rebuilt if you upgraded to current versions?

In our experience advising sellers, we’ve observed that businesses frequently underestimate their technical debt, sometimes significantly. Systems that function adequately in daily operations often mask underlying fragility. The ERP system that runs your operations may depend on a database version that Oracle stopped supporting years ago. Your customer-facing applications may run on server infrastructure approaching capacity limits. These discoveries don’t necessarily kill deals, but they often affect pricing or deal structure. Industry practitioners report that most M&A technology assessments reveal material technology issues that affect transaction terms, though the severity and financial impact vary widely.

Integration Quality and Data Architecture

Modern businesses run on interconnected systems, and buyers evaluate not just individual applications but the connections between them. Integration quality determines how efficiently data flows through your organization and how difficult it will be to connect your systems with the acquirer’s technology environment post-transaction.

Buyers assess integration architecture across multiple dimensions. Are your system connections built on documented APIs and standard protocols, or do they rely on custom scripts and manual data transfers? Do you have a coherent data architecture with consistent definitions and reliable flows, or has each system developed its own data standards over time? Can your integrations handle increased transaction volumes, or will growth stress connection points?

Data quality issues often surface during integration assessment. Inconsistent customer records across systems, duplicate entries, orphaned data from discontinued processes, these problems complicate both ongoing operations and post-acquisition integration. Buyers increasingly employ data profiling tools during due diligence, generating statistical analyses that reveal quality issues your team may have learned to work around.

Quality integration architecture exhibits specific characteristics: documented specifications, standard protocols, clear data flows, and demonstrated ability to scale. Custom integrations can be acceptable if they’re well-documented, maintainable by personnel other than the original developer, and perform adequately under growth scenarios. The concern isn’t custom code per se, it’s custom code that creates key-person dependencies or operational fragility.

The integration assessment also examines your relationships with third-party vendors and service providers. Are your systems dependent on specialized consultants who maintain tribal knowledge about how things actually work? Do you have documented contracts with software vendors that will survive ownership transition? Are there concentration risks where a single vendor provides mission-critical capabilities?

Security Posture and Compliance Status

Security has elevated from a purely technical consideration to a board-level concern in many industries, and technology due diligence increasingly reflects this shift. Buyers evaluate security posture not just to understand current risk exposure but to assess the organization’s security culture and capability for maintaining adequate protection post-acquisition. Security expectations vary significantly by industry: a B2B SaaS company faces materially different requirements than a manufacturing distributor or professional services firm.

The assessment typically begins with policy and governance review. Do you have documented security policies? Are they current, comprehensive, and actually followed? Who holds responsibility for security decisions, and do they have adequate authority and resources? These questions reveal organizational maturity around security management.

Technical security evaluation examines your infrastructure layer by layer. Network architecture, access controls, encryption practices, vulnerability management, backup and recovery capabilities, each area receives scrutiny. Buyers may conduct vulnerability assessments, penetration testing, or security audits as part of due diligence, identifying specific weaknesses that may require remediation.

Compliance status intersects with security assessment. Depending on your industry and customer base, you may face regulatory requirements around data protection, privacy, financial controls, or industry-specific standards. Buyers evaluate your compliance posture, documentation, and history of regulatory interactions. Compliance gaps can create liability exposure that sophisticated acquirers will address through transaction structure: representations and warranties, indemnification provisions, or escrow arrangements.

Important caveat: engaging external security assessment before going to market is a double-edged sword. Assessment typically costs $15,000-$75,000 depending on system complexity, with some comprehensive assessments exceeding $100,000 for businesses with complex environments or strict compliance requirements. More critically, security assessments frequently identify issues requiring significant remediation investment, often 2-5x the assessment cost itself. Before commissioning an assessment, budget for potential discovery escalation and have a clear plan for how you’ll respond if the assessment reveals material vulnerabilities. Consider engaging assessment only if you’re genuinely prepared to address findings.

Scalability and Growth Capacity

Buyers don’t typically acquire businesses to maintain the status quo. They’re often underwriting growth expectations, though the magnitude varies significantly by buyer type and strategic rationale. Strategic buyers pursuing market consolidation may project modest growth (10-20% over three years), while growth-oriented private equity may model more aggressive expansion (30-50% or more). Technology due diligence evaluates whether your systems can support the buyer’s specific growth ambitions.

Scalability assessment examines capacity across multiple dimensions. Can your infrastructure handle increased transaction volumes? Do your applications perform adequately under load, or will growth create user experience degradation? Are there architectural limitations that create hard ceilings on capability? Have you designed your systems for horizontal scaling, or will growth require expensive re-architecture?

The evaluation extends to your technology team and vendor relationships. Do you have personnel capable of managing growth-related technology challenges? Are your vendor contracts structured to accommodate increased usage, or will growth trigger significant cost escalation? Can your current technology partners support an expanded operation?

Buyers also assess innovation capability, your organization’s ability to use technology for competitive advantage. Do you have processes for evaluating and adopting new technologies? Have you demonstrated ability to execute technology initiatives successfully? Is technology viewed as a strategic enabler or merely an operational necessity?

Common Technology Issues in Lower Middle Market Transactions

Certain technology problems appear with notable frequency in lower middle market due diligence. Understanding these common patterns, while recognizing that not all businesses exhibit these issues and many buyers accept reasonable technology limitations in otherwise strong businesses, enables proactive assessment and strategic remediation.

The Fragmented Technology Stack

Many businesses in the $2M-$20M range have grown through organic technology accumulation. Each business problem spawned a new application; each application required integration with existing systems; each integration introduced complexity and potential failure points. The result: a technology stack that functions but defies coherent documentation.

Buyers encountering fragmented stacks face difficult questions. How do these systems actually work together? What happens when something breaks? Who understands the dependencies and interactions? The answers often reveal key-person risks, undocumented processes, and fragile integrations that create operational vulnerability.

Remediation before due diligence should focus on documentation and simplification where practical. Map your system architecture explicitly. Document integration points and data flows. Identify and address the most fragile connections. You may not achieve architectural elegance, but you can demonstrate understanding and control of your technology environment. That demonstration of competence often matters as much as the underlying technical state. Note that documentation quality and actual operational competence are separate considerations: focus on documenting what personnel actually understand rather than creating impressive-looking documents that don’t reflect reality.

The Founder’s Access Problem

In owner-operated businesses, founders often retain extraordinary system access: administrative credentials, approval authorities, and integration touchpoints that no other personnel possess. This concentration of access creates obvious key-person risk that buyers must address during transition.

The assessment reveals access concentration through credential audits, permission reviews, and process mapping. Buyers want to understand not just who can access what, but who must access what to keep operations functioning. Founder-dependent processes represent transition risk that affects deal structure and timeline.

Addressing access concentration requires systematic privilege distribution. Establish role-based access controls. Document administrative procedures. Train personnel on critical system functions, recognizing that effective cross-training requires sustained effort over 3-6 months and rarely eliminates all key-person risk. Focus on documenting critical procedures and establishing secondary approvers for essential functions, even if technical understanding gaps remain. The goal: demonstrate that operations can continue without founder involvement in day-to-day system management.

The Security Afterthought

Many lower middle market businesses implemented security reactively, responding to specific incidents or requirements rather than building comprehensive protection. Due diligence may reveal gaps: missing policies, inconsistent controls, unmonitored systems, and unaddressed vulnerabilities.

Security gaps can create liability exposure that affects transaction structure. Buyers may require enhanced representations and warranties, extended indemnification periods, or escrow arrangements to address potential security-related claims. Significant vulnerabilities may require remediation as a closing condition or post-closing obligation.

Proactive security assessment identifies remediable issues before due diligence begins. Assessment is discovery only; remediation is a separate decision and project. Prioritize findings based on risk severity and remediation cost-effectiveness. Accept that you may not remediate all findings, focusing on highest-risk items. Be prepared to discuss unresolved issues during due diligence with realistic remediation timelines.

The Upgrade Avoidance Pattern

Deferred maintenance accumulates across technology infrastructure. Businesses delay upgrades to avoid disruption, test minimally to preserve stability, and avoid migration to preserve familiarity. Over years, this pattern creates environments running outdated software, unsupported platforms, and deprecated technologies.

Buyers recognize upgrade avoidance quickly. The assessment catalogs software versions, support status, and patch levels across your environment. Each gap between current versions and your installations represents technical debt requiring eventual remediation.

Addressing upgrade avoidance requires honest assessment and realistic planning. Some updates can be completed before going to market. Others require longer timelines or strategic timing around acquisition and may be better handled as post-acquisition initiatives with buyer resources and integration timeline. Document your current state accurately, acknowledge gaps candidly, and present credible remediation approaches. Buyers prefer realistic assessments to optimistic representations that due diligence will contradict.

The Financial Reality of Technology Remediation

Technology remediation involves real costs that must be weighed against expected benefits. Understanding the economics enables rational prioritization rather than reflexive spending on every identified issue.

Remediation Cost Benchmarks

Based on our firm’s experience and discussions with industry practitioners, technology remediation costs for lower middle market businesses typically fall into predictable ranges based on issue type. These estimates carry moderate confidence; actual costs can vary ±30% based on complexity and vendor selection:

Quick wins (2-6 months, $10,000-$50,000): Documentation improvement, credential cleanup, basic security hardening, policy development. These address perception and demonstrate operational maturity without major system changes.

Moderate remediations (6-12 months, $50,000-$200,000): System upgrades, integration documentation and stabilization, security assessment and targeted fixes, data quality improvement. These require dedicated resources and may involve external consultants.

Major initiatives (12-18+ months, $200,000-$500,000+): System replacement, significant refactoring, architectural redesign, comprehensive security overhaul. These typically cannot be completed within a normal exit timeline and may be better positioned as post-acquisition projects.

Technology remediation projects carry implementation risk; scope creep, delays, and budget overruns are common. Budget 25-50% contingency for expansion beyond initial estimates, and have backup plans if projects cannot be completed before market entry.

ROI Framework for Remediation Decisions

Not all identified issues warrant remediation. Prioritization should be based on expected ROI: the likelihood that addressing the issue will improve buyer perception, multiplied by the valuation impact of that improvement, divided by total remediation cost.

Consider a concrete example: A seller identifies a legacy integration that would cost $75,000 in direct expenses to modernize. If this issue is likely to create a 2% valuation discount on a $10M transaction ($200,000), the calculation suggests approximately 2.7x return on direct investment. This simplified calculation excludes critical factors: management distraction during implementation (often equivalent to $15,000-$30,000 in opportunity cost), risk of project delays or failure, potential for scope expansion, and opportunity cost of delayed market entry. Including these factors typically reduces actual ROI to 1.5-2x or less, still potentially worthwhile, but requiring more nuanced analysis.

In contrast, if the same $75,000 addresses an issue that would only create a 0.5% discount ($50,000), remediation likely destroys value even before accounting for indirect costs.

This framework requires honest assessment of both remediation costs and likely buyer reaction. Not every technology issue affects buyer perception equally, and some buyers may not notice or care about issues that seem significant to you. Remediation costs are typically predictable within ±25%, while valuation impacts vary significantly based on buyer priorities and market conditions.

The Alternative to Remediation

Proactive remediation is one strategy for addressing technology concerns, but it’s not always optimal. For many profitable, well-run businesses, current technology may be adequate for buyer needs, particularly if the acquirer has strong IT capabilities or plans significant post-acquisition investment regardless. Consider alternatives:

Accept the status quo. Many buyers, particularly strategic acquirers with internal technology resources, may be satisfied with functional systems even if they’re not cutting-edge. A working legacy system that supports profitable operations may be perfectly acceptable to buyers who plan integration into their own technology environment. Before investing in remediation, honestly assess whether your technology actually creates meaningful buyer concern.

Accept lower price with earnout structure. If remediation would cost $150,000 and likely recover $200,000 in valuation, an alternative is accepting $150,000 lower upfront price with earnout tied to post-acquisition system performance. This preserves capital, defers remediation until buyer resources are available, and aligns incentives on actual outcomes.

Transparent disclosure with buyer remediation. For issues requiring 12+ months to address, proceeding to market with transparent disclosure may be superior to delaying exit. Buyers can plan remediation into their integration timeline and may execute more efficiently with their resources and expertise.

Target different buyer types. Not all acquirers evaluate technology with equal rigor or similar concerns. Financial buyers without technology expertise may conduct less intensive assessment. Industry outsiders may lack context to identify certain issues. Strategic marketing to buyer types less sensitive to your specific technology concerns may be more cost-effective than remediation.

Timeline vs. Market Timing

Remediation timeline must be weighed against market timing considerations. A technology discount of 8% on a $10M transaction ($800,000) should be compared to the cost of deferring exit 12-18 months: delayed proceeds, changes in market conditions, competitive dynamics, and opportunity cost. In many cases, proceeding to market with disclosed technology concerns and accepting some valuation impact is financially superior to delaying transaction execution.

Self-Assessment Framework for Technology Readiness

Before buyers conduct their evaluation, conduct your own. This framework provides a systematic approach to identifying technology concerns that due diligence will likely reveal, while recognizing that many lower middle market businesses have reasonably sound technology operations that don’t require dramatic intervention.

Documentation Assessment

Begin with documentation review. For each major system, can you produce current architecture diagrams? Integration documentation? User guides and operational procedures? Administrative credentials and access procedures? Data dictionaries and quality specifications?

Documentation gaps represent both literal deficiencies and potential symptoms of deeper issues. Documentation quality and personnel knowledge are separate considerations. Test both. A system with strong personnel knowledge but incomplete documentation needs documentation investment. A system with extensive documentation but weak personnel understanding needs training and knowledge transfer.

For most lower middle market businesses, comprehensive system documentation typically requires 200-400 professional hours. This can be achieved through dedicated internal effort over 4-6 months (recognizing that quality documentation requires multiple review and revision cycles), external consultants over 3-4 months, or incremental ongoing work over 12+ months with reduced scope. Earlier timelines require more concentrated resources and often sacrifice quality for speed.

Prioritize documentation for systems central to operations and revenue generation. Accept that perfect documentation may be unachievable, but demonstrate meaningful progress and ongoing commitment. Accurate but incomplete documentation is preferable to comprehensive documentation that’s inaccurate or contradicts actual system behavior.

Dependency Mapping

Identify your technology dependencies explicitly. Which personnel hold critical knowledge about specific systems? Which vendors provide essential services? Which integrations must function for operations to continue?

Map these dependencies visually. Create diagrams showing system interconnections, identify single points of failure, and highlight concentration risks. This exercise often reveals vulnerabilities that daily operations obscure but due diligence will expose.

Develop mitigation strategies for significant dependencies. Cross-train personnel on critical systems (recognizing this requires sustained effort). Establish relationships with alternative vendors. Build redundancy into essential integrations. You may not eliminate all dependencies, but you can demonstrate awareness and active risk management.

Security Self-Evaluation

Conduct honest security assessment using established frameworks. The NIST Cybersecurity Framework provides accessible structure for organizations without dedicated security expertise. Evaluate your current practices against framework categories: Identify, Protect, Detect, Respond, Recover.

Identify gaps between framework recommendations and current practices. Prioritize based on risk severity and remediation cost-effectiveness. Address immediately remediable issues; develop realistic plans for longer-term improvements.

Consider engaging external security assessment before due diligence begins, but enter with eyes open about costs and potential discoveries. Third-party evaluation provides credibility and may identify issues your internal review missed. Assessments frequently identify issues requiring significant remediation investment. In our experience, roughly one-third of security assessments reveal material vulnerabilities requiring remediation budgets exceeding $100,000. Plan for potential discovery escalation before commissioning assessment; don’t start this process unless you’re prepared to act on findings.

Scalability Stress Testing

Evaluate your systems against growth scenarios relevant to likely buyer expectations. If transaction volume doubled over two years, which systems would strain first? If headcount increased 50%, could your infrastructure support additional users? If you acquired a competitor, could you integrate their operations onto your technology platform?

These scenarios reveal scalability limitations before due diligence exposes them. Identify specific constraints and evaluate remediation options. Some limitations require significant investment; others yield to relatively modest intervention. Understanding your scalability position enables credible conversation during buyer evaluation, including honest acknowledgment of constraints and realistic remediation approaches.

Actionable Takeaways

Technology due diligence will occur whether you prepare for it or not. Proactive assessment enables you to understand issues before buyers discover them and make rational decisions about what to remediate versus what to manage through disclosure and deal structure.

Recognize technology’s actual role in transactions. While technology assessment has become standard practice, technology issues rarely determine transaction outcomes for profitable businesses with sound operations. Well-maintained technology often correlates with stronger valuations, though this relationship reflects broader operational sophistication rather than technology alone. Don’t let technology concerns overshadow fundamentally strong business performance.

Conduct honest self-assessment first. Use the frameworks outlined above to evaluate your technology environment objectively. Identify issues that thorough due diligence will likely reveal. Distinguish between problems you can fix cost-effectively, concerns you should explain transparently, and issues better addressed post-acquisition.

Prioritize remediation by ROI, including indirect costs. Create a prioritized remediation plan focused on issues where expected valuation impact meaningfully exceeds total remediation cost, including management distraction, implementation risk, and opportunity cost. Execute against this plan consistently, documenting progress and decisions. Resist the temptation to address every identified issue; some remediations destroy value.

Start documentation improvement early. Every month before going to market allows incremental improvement to system documentation. Prioritize core operational systems, integration touchpoints, and administrative procedures. Budget 200-400 hours of professional effort for comprehensive documentation over a realistic 4-6 month timeline.

Prepare credible narratives for unresolved concerns. Some technology issues cannot or should not be fully addressed before going to market. For these concerns, develop honest explanations that acknowledge the issue, demonstrate understanding of implications, and present realistic remediation approaches including post-acquisition options.

Consider doing nothing. Evaluate whether your current technology is actually a meaningful buyer concern before investing in remediation. For many businesses, functional systems supporting profitable operations are perfectly acceptable to acquirers, especially strategic buyers who plan technology integration regardless.

Understand remediation timeline realities. Quick wins require 2-6 months. Significant remediations require 6-12 months with contingency for delays. Major initiatives require 12-18+ months. Evaluate your realistic exit timeline before committing to remediation; some issues may be better managed as post-acquisition concerns.

Conclusion

Technology due diligence has become an increasingly important element of lower middle market transactions, though its weight varies significantly by industry and buyer type. Buyers invest meaningful resources in technology assessment because what they find informs their ability to achieve projected returns and manage integration risk. Well-maintained technology often correlates with stronger valuations and smoother transactions, though this reflects broader operational sophistication rather than technology alone. Technology environments requiring significant post-acquisition investment may create downward pressure on price or require creative deal structuring.

For business owners planning exits, technology assessment represents both risk and opportunity, but perspective matters. Technology rarely determines transaction outcomes for profitable, well-run businesses. The risk: unprepared sellers face discoveries during due diligence that undermine their negotiating position. The opportunity: proactive assessment demonstrates operational sophistication and enables rational remediation prioritization.

We encourage owners to begin technology evaluation early in their exit planning timeline, not to fix everything, but to understand what exists and make informed decisions. Systems requiring significant remediation need time for improvement if you choose that path. Documentation that adequately describes complex environments requires sustained effort. Security postures that inspire buyer confidence result from ongoing commitment rather than last-minute intervention.

Technology remediation is not mandatory for every identified issue; the question is which concerns materially affect buyer pricing and whether remediation cost-effectively addresses them. Proactive assessment provides timeline control, cost management, and narrative preparation. The buyers evaluating your technology will be thorough and systematic. Meet them with equivalent preparation: understand what they’ll assess, anticipate their likely concerns, and demonstrate that your technology environment, whatever its current state, is understood, managed, and positioned for successful transition.