Software Code Review in Due Diligence: Key Red Flags Investors Should Watch For

KMS Team - Apr 2, 2025

For many investors, tech due diligence means reaching for financial reports, legal analyses, and profit forecasts… But one critical area often gets overlooked: The quality of the code itself.

For investors considering acquisitions or funding rounds, the importance of a thorough software code review simply cannot be overstated. No one wants to invest in great software on paper. A code review can reveal potential risks, technical debt, and long-term scalability issues that will directly impact valuation — and whether or not to invest.

However, a code review is often overlooked for one simple reason. Investors aren’t always software developers, so it can be difficult to know where to start reviewing code and how to interpret the results. In this blog post, the experts at KMS Technology break down the key red flags investors should watch for when evaluating software codebases and how these issues can affect the bottom line.

Why Code Review Matters

For investors that are evaluating a tech company, reviewing code quality is an essential part of the due diligence process.

A strong code base reflects solid engineering practices, while weak or inconsistent code can reveal deeper structural issues that might rear their ugly heads later in the growth stage.

Sure, financials are important, but glowing profit margins are no excuse to skip code reviews — if the software doesn’t meet coding standards, the financials won’t be glowing for long. Poorly written code increases the risk of technical debt, performance bottlenecks, and security breaches — factors that can reduce a company’s valuation and derail an acquisition.

Key reasons investors must evaluate code quality include:

• Scalability & Maintainability – Can the codebase support future growth without major rewrites?
• Security & Compliance – Are there vulnerabilities that could expose the company to legal or reputational risks?
• Operational Costs – How much effort is required to maintain and update the software?
• Team Longevity – What does the team behind the code look like? How do they stack up against other teams in similar businesses?

Ignoring these aspects can lead to acquisitions that are really more of a liability than an asset, so ignore them at your peril.

10-Step Code Review Checklist for Due Diligence

In any investment opportunity, time constraints, expenses, and resources available inevitably limit the amount of review possible. With that in mind, below are the 10 steps our experts follow when conducting a review and how they stack up against code review best practices.

1. Code Quality and Maintainability

The main priority in any code review is the quality of the code and the defect density that the reviewer encounters.

A well-structured codebase should be easy to read, follow consistent formatting, and avoid unnecessary complexity. A poorly maintained code base is a ticking time bomb, leading to higher costs for fixes and enhancements.

• Are coding standards followed, or is there sloppy code that makes maintenance difficult?
• Does the code contain redundant or excessively complex logic? Are comments used effectively to explain complex logic if required?
• Does the code follow clear and consistent coding standards (including documented and standardized naming conventions and clear formatting)?
• Is the code modular, with well-defined classes and functions?
• Does it avoid hardcoded values and use constants or configurations instead?
• Are trivial changes avoided to keep the codebase clean?

🚩 Our Expert’s Red Flag

A high defect rate indicates a large number of issues per line of code. Sloppy code or overly complex code may also signal issues to come.

2. Security Vulnerabilities

Security flaws can lead to data breaches, regulatory fines, and reputational damage. A proper security strategy is non-negotiable for investors and is a top priority in the code review.

• Does the code follow secure coding best practices?
• Does the system handle test cases for authentication and data validation?
• Are common vulnerabilities, such as SQL injection or cross-site scripting, mitigated? If so, how?
• Are authentication and authorization mechanisms correctly in place (and adhered to)?
• Are there hardcoded credentials in the repository?
• Is sensitive data encrypted and protected with appropriate testing measures?
• Is security testing a regular part of the code review process?

🚩 Our Expert’s Red Flag

If security is treated as an afterthought, or if teams skip code reviews for security vulnerabilities, this is a sign that security could be lacking (or that it’s not a team’s priority, which is a red flag in itself).

3. Test Coverage and Automated Testing

Testing is the backbone of software reliability. Without it, even minor changes can introduce bugs, security vulnerabilities, or performance issues that may go unnoticed until they cause real-world problems. Test coverage refers to the extent to which the software’s functionality is tested by automated or manual tests.

A high level of test coverage found in the code review process means that critical features, edge cases, and failure scenarios are accounted for before deployment. Automated testing tools allow teams to catch errors early in the development process, reducing time reviewing code and costs associated with fixing defects later.

• Are there automated tests for critical functionality?
• Does the test suite cover edge cases and failure scenarios?
• Is the defect rate low across different test scenarios?
• Are developers regularly running tests before pushing code?
• Do test cases follow best practices and provide meaningful validation?

🚩 Our Expert’s Red Flag

A lack of automated code review tools for testing leads to undetected regressions. The best and most experienced engineering teams prioritize automation as part of their development culture. Without this, software reliability suffers, increasing long-term risks for both the product and the business.

4. Use of Peer Code Review and Constructive Feedback

A strong code review process helps maintain high code quality after a code change, reducing defects and building collaboration between developers. Effective peer code reviews ensure that code is not only functional but also secure, maintainable, and aligned with coding standards.

For investors, a well-structured code review process signals good engineering discipline and long-term scalability. If developers skip code reviews due to time constraints, it often leads to higher defect density and higher maintenance costs.

• Does the team embrace peer review as a standard practice?
• Do senior engineers mentor junior developers during reviews?
• Does the team follow a structured code review checklist?
• Are code reviewers allocated in the team, or does everyone participate in this?
• Is constructive feedback provided in pull requests, or are reviews rushed?
• Do code owners take responsibility for fixing identified issues in their own code? If not, how are bugs fixed?

🚩 Our Expert’s Red Flag

No peer code review process is in place. If teams push test code through without peer review due to time constraints, it suggests poor development practices, a lack of accountability, and higher defect rates are likely in production.

5. Compliance with Coding Standards and Best Practices

Adhering to coding standards and best practices is the most effective way of delivering quality code. Investors should check whether the development team follows industry best practices and enforces consistent coding guidelines across the whole team.

• Does the team follow a documented set of coding standards? If so, do developers regularly review and update these coding standards?
• Are recognized, industry-standard code review best practices followed?
• Does the company enforce consistent coding standards across teams?
• Are best practices integrated into the development process?
• Are developers adding comments and documentation where necessary?

🚩 Our Expert’s Red Flag

If developers frequently skip code reviews or push inconsistent code without automated checks, it indicates poor quality control and increased technical debt.

6. Performance and Scalability

Poorly optimized code can lead to slow load times, resource inefficiencies, and scaling issues as the software grows. A thorough code review should evaluate whether the system is designed to handle increased user demand without degrading performance.

A scalable architecture ensures long-term stability and prevents costly refactoring in the future. Investors should prioritize teams that emphasize performance in their development process.

• Does the code efficiently handle large datasets, requests, and concurrent users?
• Are there unnecessary loops, redundant computations, or excessive API calls?
• Are database queries optimized to avoid expensive operations like full table scans?
• Does the team run performance tests before pushing code to production?
• Is caching used effectively to minimize redundant processing?

🚩 Our Expert’s Red Flag

Frequent reports of performance bottlenecks, high latency, or code changes that introduce inefficiencies indicate a lack of focus on scalable development practices.

7. Documentation and Knowledge Sharing

A well-documented codebase is an essential part of maintainability and long-term success. Without proper documentation, onboarding new developers, fixing bugs, and implementing new features becomes a slow and error-prone process.

Clear documentation ensures that code reviewers, developers, and other teams understand the reasoning behind key decisions.

• Are function, class, and module descriptions provided to explain code intent?
• Are comments used effectively to clarify complex or non-self-explanatory logic?
• Does the project contain up-to-date documentation for architecture, APIs, and dependencies?
• Are best practices followed for internal documentation, such as READMEs and inline comments?
• Is documentation reviewed alongside code to ensure consistency with the latest changes?

🚩 Our Expert’s Red Flag

Code that lacks comments has outdated documentation, or relies solely on tribal knowledge creates long-term maintenance risks and slows down future development.

8. Defect Rate and Bug Resolution Process

The defect rate measures how often errors and bugs appear in the software. A high defect density suggests poor coding practices, inadequate testing, or rushed development cycles.

Investors should ensure that teams have an effective bug tracking and resolution process to keep defects under control.

• Is there a structured defect-tracking system in place?
• How quickly are bugs identified and fixed after being reported?
• Does the team run tests and peer code reviews before pushing changes to avoid regressions?
• Are defect trends analyzed to identify recurring issues in the code base?
• Is there an escalation process for critical defects affecting stability or security?

🚩 Our Expert’s Red Flag

A high defect rate that continues increasing over time suggests deeper structural issues in the development process.

9. Use of Code Review Tools and Automation

Automated tools improve the efficiency of code reviews by catching common mistakes, enforcing coding standards, and reducing manual effort. Not to mention, automation can increase the inspection rate while removing the time constraints that often limit a code review.

Investors should check whether the team leverages automation in their enterprise development workflow and the processes around it.

• Are automated testing tools used for static analysis, security checks, and style enforcement?
• Does the team have a structured pipeline for continuous integration testing and deployment (for example, CI/CD)?
• Are test cases automatically executed before merging new code?
• Are code reviews integrated with pull requests, ensuring every change is reviewed?
• Do developers rely on code review checklists to maintain best practices?

🚩 Our Expert’s Red Flag

Skipping code reviews due to time constraints, or relying solely on manual reviews without automation, increases the risk of missed defects.

10. Technical Debt and Refactoring Practices

Technical debt accumulates when teams cut corners or push unoptimized code to meet deadlines. While some debt is inevitable up to a point, a well-managed development process prioritizes refactoring and long-term maintainability (paying the debt).

Investors should ensure that teams proactively address technical debt rather than deferring it indefinitely.

• Does the team regularly review and refactor outdated or inefficient code?
• Are there structured plans to address existing technical debt?
• Does the company balance feature development with maintaining and improving the code base?
• Do developers follow best practices to avoid accumulating unnecessary debt?
• Is there a clear strategy for phasing out legacy systems or deprecated dependencies?

🚩 Our Expert’s Red Flag

Ignoring technical debt leads to a bloated, unstable, and difficult-to-maintain code base that slows down development and increases costs over time.

The Last Word From Our Experts

It’s no understatement to say that a formal review of a company’s development process can make or break an investment decision.

A great code review is like peeking behind those flashy demos and sleek financial brochures into the nitty-gritty of a business. Savvy investors always assess how well the whole team adheres to code review best practices.

But doing it solo is risky. Even experienced investors can miss critical red flags buried in a software project’s structure. That’s why having technical experts review code quality, security, and maintainability is the most effective way to validate an investment’s potential.

Need expert support assessing a company’s codebase? KMS Technology specializes in technical due diligence, code audits, and software evaluations to help you make informed investment decisions. Get in touch today to safeguard your next tech investment.