Tech Due Diligence Checklist
Before investing in any company, you must do your due diligence. But when it comes to tech (or “tech-enabled” companies), getting your due diligence right is even more important.
A company can look healthy and future-focused on paper, but behind sleek interfaces, shoddy development work, misrepresented ownership issues, and noncompliance with industry-specific regulations can tell an entirely different story. Having an expert in your corner (and a robust tech due diligence checklist to hand) will save you from potential financial risks and merger failure down the line.
In this article, our experts break down their due diligence process, listing the key areas to assess before committing to an acquisition or investment.
What is Tech Due Diligence?
Tech Due Diligence (tech DD) is the process by which subject matter experts, often former CTOs or CPOs, evaluate a company’s technology and product value chain to uncover key insights that inform external investment decisions like acquisitions or stock purchase agreements.
Alongside the traditional due diligence areas like operational due diligence, legal due diligence, and financial statements, tech DD ensures that the technology and product development setup is similarly robust, scalable, and aligned with business objectives.
Tech due diligence is even more important when making a technology investment, whether it’s acquiring a company, merging with a partner, or funding a startup. In these cases, more than physical assets or historical financial statements, technology is the crux of a company’s financial health and future potential. A company’s intellectual property may look promising on the surface, but a deeper technical review often reveals gaps in software architecture, compliance issues, or dependencies that could cause significant problems later.
Who Undergoes the Due Diligence Process?
One of the most common scenarios we encounter at KMS Technology is buy-side due diligence, where investment teams from venture capital or private equity firms evaluate a target company’s technology and product setup before committing to an acquisition.
On the buy-side, the primary objective is to minimize risk, uncover competitive advantages, and identify opportunities for value creation. By conducting a comprehensive assessment, they can detect red flags, collect the information they need for informed decision-making during the investment process, and receive actionable recommendations for post-transaction priorities, such as process automation or better data utilization. A due diligence checklist helps investors identify risks, value creation opportunities, and potential synergies post-transaction.
On the other hand, sell-side due diligence may be performed by internal stakeholders who want a clearer picture of their own technology infrastructure, development processes, and team capabilities, perhaps to prepare for fundraising, a future acquisition, or a major growth phase.
This type of assessment focuses less on gaining a comprehensive understanding of the technology (presumably, the internal stakeholders understand their product, cash flow statements, and own organizational documents) but instead looks at streamlining development, increasing efficiency, and resolving scaling challenges.
Our Tech Due Diligence Checklist
So, where to start? If you’re ready to make an investment into a new business, then the due diligence process can seem overwhelming. How can investors separate the sleek sales pitch from the reality of hidden liabilities and potential risks? How can you accurately deep dive into the company’s operations, intellectual property, business operations, regulatory compliance, and financial health to gain a thorough understanding?
Here, we provide you with a comprehensive evaluation of what to look for in a tech due diligence checklist, ensuring that you make an informed decision before finalizing any mergers and acquisitions. We’ve divided our checklist into five key elements our expert diligence team looks out for, plus the relevant questions to ask yourself as you undergo the due diligence process.
Before we get into it, though, working with the right partner makes all the difference. At KMS Technology, we help businesses and investors assess risks, optimize technology, and uncover growth opportunities, giving you the clarity and confidence to make the right move. Find out more about our process here.
In the meantime, let’s get stuck into our tech due diligence checklist.
1. Technology & Architecture
It’s always best to start at the foundations, and this is where we begin at KMS Technology by deep diving into the basics of the technology, its architecture, and its code quality.
A target company’s technology stack should be scalable, maintainable, and aligned with its strategic plans. If its software infrastructure is outdated or full of technical debt, future development will be expensive and slow.
Due Diligence Checklist:
- Software Architecture & Codebase: Is the code well-documented, modular, and built using modern frameworks? Is it functional and moldable?
- Access to Code: Is access to source code restricted to only those who require access to perform their job duties?
- System Scalability: Can the product handle increased user demand, or will it require major refactoring to scale efficiently?
- Integration Capabilities: Does it connect easily with third-party applications, or are there significant limitations? How does it connect to a suite of the company’s products, if applicable?
- Physical Assets: Does the company own its servers, networking hardware, or other infrastructure, or is it entirely cloud-dependent? If so, what material contracts govern third-party relationships, and how might they impact the scalability and performance of the technology?
2. Security & Compliance
Weak security is one of the biggest potential financial risks in an acquisition. A company that lacks strong data governance, data protection laws compliance, and cybersecurity protocols could face threatened litigation or legal disputes if a breach occurs.
Due Diligence Checklist:
- Approved Security Processes – Does the organization have approved documentation on information security policies? Is ongoing training and employee support implemented?
- Data Security & Protection – Are encryption, authentication, and access controls properly implemented? Is security testing routinely carried out? Have there been past breaches? If so, how were they handled?
- Regulatory Compliance – Does the company meet industry-specific regulations such as GDPR, HIPAA, or SOC 2?
- Legal Compliance & Audits – Are there any unresolved legal disputes, settlement documents, or agreements relating to past security breaches?
- Document Retention – Are sensitive documents stored securely, or are they vulnerable to unauthorized access?
Security directly impacts financial risks, contractual obligations, and potential risks post-acquisition – it’s not just a technological issue. As a result, our team places emphasis on this aspect, helping companies review security frameworks, relevant regulations, regulatory approvals, and compliance gaps to mitigate risk before a deal closes.
3. How the Software is Built & Maintained
The way a company develops and maintains its software determines its future viability. You can have audited financial statements and a strong projected revenue forecast, but a weak development process results in unstable products, customer dissatisfaction, and financial performance issues.
Due Diligence Checklist:
- Software Development Lifecycle (SDLC): Does the company follow Agile, Waterfall, or DevOps practices? What are the bottlenecks they encounter with their lifecycle?
- Testing & Quality Assurance: How robust is the testing process? Does the company use automated testing and continuous integration (CI/CD)?
- Operational Due Diligence: Are there documented internal processes for deploying and monitoring software updates?
- Human Resources & Talent Retention: Is the engineering team stable, or is there a high turnover? How are high (and low) performers identified and managed? How strong is the leadership team? How are new employees trained and onboarded? How is performance managed?
4. Intellectual Property & Licensing: Confirming Ownership & Legal Rights
Understanding a company’s intellectual property (IP), trade secrets, and other organizational documents is critical.
Failing to confirm ownership can lead to legal disputes and expensive contract renegotiations — and mean that you’re not investing in what you thought you were.
Key Documents to Review:
- Patents & Trademarks: Does the company hold any proprietary technology or trade secrets?
- Software Licensing Agreements: Are all third-party components properly licensed, or is there exposure to potential IP claims?
- Security Agreements & Other Agreements: Are there hidden liabilities tied to vendor contracts or service agreements?
Navigating IP risks effectively means conducting thorough legal, due diligence, involving legal teams from both sides and evaluating a company’s organizational documents and agreements relating to software ownership.
5. Financial & Legal Due Diligence
We all know that a company’s financial health extends beyond income statements, financial statements, and cash flow statements. “Great on paper” can mean crafty accounting methods, hidden liabilities, and dangerous costs under the surface.
It’s important to know that many potential financial risks remain hidden in contingent liabilities, accounts receivable, and property taxes – so a deep analysis of documents relating to these areas is important.
Key Documents to Review:
- Historical Financial Statements & Tax Filings: Are there discrepancies in financial performance, tax laws compliance, or financial risks?
- Employee Benefits & Health Insurance: Are all employee obligations properly documented, including collective bargaining agreements?
- Real Property & Physical Assets: Does the company own physical assets, or are they leased?
- Stock Purchase Agreements & Asset Purchase Terms: What liabilities are attached to stock or asset purchases?
A weak financial due diligence process can expose investors to undocumented financial risks that affect capital budgets, supply chain stability, and cash flow, so financial statements are a key aspect of every technological due diligence checklist.
The Final Steps Before Closing a Deal
Now you’ve done it all in parts, the final step in the due diligence process is to put it all together. Every document in the virtual data room should be reviewed alongside industry-specific regulations, material contracts, and strategic plans for a holistic view of the opportunity (and its drawbacks).
Make sure to:
- Cross-check regulatory approvals, legal compliance, and contractual obligations
- Assess customer satisfaction levels and key competitors in the market
- Validate financial health, hidden liabilities, and agreements relating to acquisitions
- Double-check again that all relevant documents and tax filings are accounted for
Tech Due Diligence with Your Expert Partner
While this tech due diligence checklist is a great starting point, it’s certainly not supposed to be the be-all and end-all of your due diligence process. Expert insight makes the difference between a smooth acquisition and a costly mistake. If you’re in the acquisition, fundraising, or technological assessment stage in your business, then the best place to start is to seek a qualified due diligence partner to guide your efforts.
At KMS Technology, our due diligence process provides technical expertise, in-depth analysis, and actionable recommendations to support confident, well-informed decisions. Reach out today to discuss how we can support your due diligence process.
