Technical Due Diligence

Technical due diligence examines the technical substance of a target. In an industrial context that means the condition and age of the machinery, maintenance backlog, utilisation, energy efficiency and compliance with safety and environmental requirements. In a software context it means architecture, code quality, technical debt, scalability and dependencies on open source components and their licence terms. Methodologically the review draws on site visits, analysis of maintenance and downtime data, conversations with technical staff and, for software, examination of the source code and development processes. The key output is a quantified investment requirement for the next three to five years, which feeds straight into the business plan and therefore the purchase price.

It frequently uncovers deferred capital spending that shows the seller's reported margin to be unsustainable, because the replacement investment falls to the buyer. Economically such a finding works either as a price reduction or as a debt-like item in the equity bridge. A second focus is dependence on individual people, suppliers or technologies, because it increases risk after the change of ownership. It should be distinguished from commercial due diligence, which examines the market, and from IT due diligence, which targets systems landscape and security.

Among open source licences, copyleft licences are critical, because in extreme cases they can require disclosure of proprietary source code. The review is commissioned above all for companies whose value rests substantially on proprietary technology, that is software, medical technology and industrial companies with their own development.