Technical debt is a hidden cost in software systems—an accumulation of shortcuts, outdated code, or suboptimal design choices that create future challenges. In the context of due diligence, technical debt is one of the most critical risk factors to identify and quantify.

Technical debt refers to the long-term cost of choosing easier, faster, or less robust technical solutions during software development. It can arise from rapid prototyping, insufficient documentation, legacy systems, or poor coding practices.

Like financial debt, technical debt must eventually be "repaid"—either through refactoring, rewriting, or dealing with bugs and performance issues. If ignored, it can limit agility, increase development costs, and introduce serious risks over time.

Forms of technical debt include:

• Fragile or untested code
• Hardcoded configurations
• Lack of modularity
• Poor documentation
• Obsolete third-party dependencies

‍

In a due diligence context, technical debt is a red flag that impacts both valuation and risk exposure. Here's why it matters:

• Slows development: A high-debt codebase reduces team velocity.
• Increases maintenance costs: New features or fixes take longer to implement.
• Limits scalability: Architectures burdened with shortcuts often can’t grow efficiently.
• Introduces risk: Legacy code may contain security flaws or hidden bugs.
• Affects integration: Post-acquisition tech integration becomes harder and riskier.

Buyers and investors need a clear picture of existing technical debt to estimate remediation costs, plan realistic roadmaps, and protect long-term value.

‍