You've signed an LOI and are in the midst of due diligence looking to sell your tech company to a prospective buyer. Things seem to go well during the process until technical due diligence, when the buyer's technical auditors uncover what they see as out-of-date technology in your product. They take the position that you either need to upgrade the technology or they will lower the price they are willing to pay for your company. They may even drop out of the deal. This is a case of technical debt, also known as design debt or code debt, a situation where the technology of interest is not current or is otherwise sub-optimal. Often technical debt results from decisions that prioritize getting software into the market quickly over optimizing the code.  Technical debt also encompasses a variety of other possible deficiencies ranging from code that uses languages that are no longer supported, to code that is not secure, to undocumented design features, to open source licensing issues.  If you are a founder or CEO of a company that you want to sell or you want to acquire a partner for growth, how do you deal with technical debt? 

Determine if you have technical debt

Before you deal with technical debt, it is important to determine if you actually have technical debt. A good way to do that is to go through a self-due diligence process that includes a thorough technical review of your company's products and technology either internally or through a third party. If you do uncover issues, the next step is to evaluate each issue and decide which you will address prior to entering the M&A process. These are difficult decisions because fixing problems ‒ especially major problems ‒ can involve the investment of significant resources, perhaps resources your company does not have.  However, not addressing the problems can reduce the value of your company or kill an M&A deal.

Typically, the buyer or a third party hired by the buyer will do a thorough review of your technology during technical due diligence. This typically includes following areas:

  • Architecture
  • Code
  • Technology roadmap
  • System requirements
  • Security
  • Non-functional requirements

Make sure to cover these areas in self-due diligence and do it as early as possible. The earlier you identify major issues in these areas, the more opportunity you have to fix them or at least limit their impact. In terms of priority, it makes sense to first fix issues that require relatively few resources, for instance, fixing software licensing or compliance issues. Then go on to other issues that require a bigger investment of time and effort.

Be honest, but control the narrative

Disclosing known technical issues to the buyer is better than having the buyer uncover those issues. That honesty reinforces your credibility to the buyer and may mitigate against the buyer asking for a reduction in the enterprise value or a change in terms once due diligence begins. If there are known issues with your technology, make sure you position them in a way that points to your plan for dealing with them as you specify your growth roadmap, one that includes your tech stack.

Develop an action plan and track it

Whether you or the buyer identifies technical debt issues, it is important that you put an action plan in place to fix them. This should include a timeline as well as resource allocations. The plan can include actions you plan to take prior to the acquisition or post-acquisition. Having an action plan helps in negotiating deal terms with the buyer. After the action plan is agreed to by the buyer, track the progress of the actions. Put together a roadmap that identifies the status of each action, its target completion date, and the resource needed to complete each action.

Negotiate

Technical debt issues are open to negotiation. For example, through negotiation you might determine that the buyer is willing to tolerate some of the technical debt. What is important is to understand the buyer's priorities. It also helps to have a good understanding of the issues that may be considered technical debt. It is valuable to understand how a buyer thinks about technical due diligence when you are negotiating the LOI. Ask the buyer what their approach to due diligence is and whether they will be using a third party to do it. Depending on what is observed in technical due diligence, you might be able to assure the buyer that the issues are manageable and can be addressed relatively easily. Or you might point out that an issue that the buyer sees as requiring immediate attention can be handled over time. Or you might convince the buyer to lower his estimate of the resources he would need to expend to fix a technical debt issue. Negotiating technical debt issues can lead to compromise between the buyer and seller that is a win-win for both parties. Experience matters when negotiating technical issues associated with observed technical debt.

Get professional advice

Having a professional advisor at your side is important as you prepare for and go through the M&A process. With an unmatched track record of advising on the sale of more technology companies than any other firm in history, and driven by a highly professional, detailed M&A process designed to get sellers an optimal outcome, Corum can advise you regarding effective ways to manage technical debt. Corum's team of experienced CEOs, who have run, sold, and bought companies, can help you manage technical debt in various ways, such as in:

  • Prioritizing technical debt issues
  • Identifying who should be responsible for addressing specific technical debt issues
  • Calculating the cost in time and money of resolving technical debt issues

In addition, Corum will be your advocate as you negotiate technical debt issues with prospective buyers. That support is part of Corum’s goal to help you and your stakeholders achieve an optimal outcome.