Imagine a private equity partner meeting his deal team in a dim boardroom late one night. The target company looks great on paper – strong market position and steady cash flow – but a question hangs in the air: what about technology? As the discussion turns to the IT setup, concerns quickly emerge: aging servers sitting idle in a closet, monolithic legacy software nearing end-of-life, and barely any documentation on system architecture. In that moment, everyone realizes technology could be the hidden trap that erodes value. This is why savvy PE investors run a technology due diligence checklist before closing deals. Beyond the financial statements, they probe four critical areas – IT infrastructure, cybersecurity, licensing compliance, and hidden tech costs – to uncover unseen liabilities. Below is a structured checklist to guide that process.
IT Infrastructure
- Scalability and Performance: Can the company’s infrastructure handle growth without costly overhauls? Modern IT setups should be cloud-ready or virtualized to flex with demand. Check whether core applications (ERP, CRM, databases) and servers have capacity headroom or require costly upgrades. Downtime risk is high: one survey found 90% of firms report that an hour of downtime costs over $300,000. PE investors should ensure crucial systems have failover or redundancy to avoid such outages.
- Redundancy and Reliability: Are there backup systems and disaster recovery plans? Confirm that data centers (or cloud environments) have uninterruptible power and network failovers. More than two-thirds of outages now cost companies over $100,000, so a single server failure could wipe out a year of profit. Look for backup generators, secondary data sites, or cloud failover configurations that mitigate business interruption.
- Legacy Systems: How much of the tech stack is outdated? Many businesses rely on software that’s decades old. In fact, Dell reported that 70% of software used by Fortune 500 companies was developed over 20 years ago. Legacy hardware and applications often lack vendor support, incur high maintenance costs, and introduce security holes. Verify whether the target’s key systems are on recent platforms or still running end-of-life servers. If legacy tech is prevalent, be prepared to factor modernization costs into the deal.
- Network and Architecture Documentation: Does the company have up-to-date network diagrams, configuration files, and an IT team or managed service provider (MSP) that understands the environment? A missing documentation or “single person knowledge” issue is a red flag. PE due diligence should ensure there is clear insight into data flows, cloud architecture, and system dependencies. Plan to document or outsource knowledge transfer if needed.
- Cloud Adoption & Virtualization: Evaluate whether operations are moving toward the cloud. In 2024, an estimated 94% of companies use some form of cloud computing (though adoption varies by industry). Migrating workloads to cloud platforms can greatly improve scalability and reduce capital expenditure on hardware. Check if key business systems can run in a public or private cloud, and if not, what the effort would be. Cloud-ready infrastructure adds flexibility for a PE firm to scale portfolio companies or integrate add-on acquisitions later.
Cybersecurity Posture
- Vulnerability and Risk Assessment: Inventory recent security assessments or penetration tests. Identify any open high-severity vulnerabilities in software and networks. The stakes are high – breaches are becoming shockingly expensive. For example, the 2024 IBM/Ponemon report found the average data breach cost hit $4.88 million, up 10% from 2023. Also, 75% of organizations suffered at least one ransomware attack in the past year. These figures show that a single cyber incident can wipe out years of EBIT. Verify that the target has a current patch management process, intrusion detection, and incident response plan.
- Compliance Standards: Determine which regulatory frameworks apply (PCI-DSS, HIPAA, GDPR, CMMC, etc.) and whether the company is fully compliant. A non-compliance finding (for example, in a PCI audit or HIPAA review) could trigger costly fines, legal action, and customer churn. Check certifications like ISO 27001 or SOC 2 if relevant. PE firms should confirm that data protection policies (encryption, access controls, backup procedures) meet industry standards. In regulated industries, budget for remediating any compliance gaps after closing.
- Data Protection Policies: Review how sensitive data is handled. All critical data (customer PII, intellectual property, financial records) should be encrypted at rest and in transit. Examine backup and recovery processes – are backups stored offsite or in a secure cloud, and are they tested regularly? Ensure multi-factor authentication (MFA) is used for remote and privileged access. Given that 94% of malware is delivered via email, employee training and phishing tests are key defenses. Ask whether the firm runs regular phishing simulations and security awareness programs. Poor policies here can leave the company vulnerable to avoidable breaches.
- Security Team and Expertise: Check the competence and size of the security team. Does the company have a dedicated CISO or security consultant? How do they monitor threats (e.g. Security Information and Event Management)? Some PE firms factor in retaining an MSSP (Managed Security Service Provider) post-acquisition to shore up any gaps. Documenting existing processes (patch windows, vulnerability scans, 24/7 monitoring) is crucial so hidden risks don’t emerge unexpectedly.
Licensing Risks
- Software Licensing Compliance: Conduct a full audit of all licensed software – from operating systems and databases to office productivity suites. Many companies under-license or over-deploy licenses. According to an industry study, 55% of companies ended up paying at least $500K in vendor fines over three years due to license non-compliance, and nearly a quarter have paid over $10 million. License audits (by Microsoft, Oracle, SAP, Adobe, etc.) can happen at any time. PE firms should verify that the books of license entitlements match actual usage, and ensure renewals or transfers are in order. Missing or outdated contracts are a red flag.
- Open-Source Components: Identify any open-source or third-party libraries used in the company’s products or internal tools. Open-source software (OSS) can save money, but licensing obligations must be managed. A Black Duck report found 97% of codebases include open-source components, and 86% contain at least one known vulnerability. Moreover, complex dependencies can introduce hidden license risks – about 30% of license conflicts come from nested (transitive) open-source libraries. Ensure the target maintains a Software Bill of Materials (SBOM) or similar inventory, and that any copyleft or restrictive licenses (GPL, AGPL, etc.) are identified. Undisclosed open-source use might require code refactoring to avoid violating obligations.
- Proprietary IP and Custom Code: For businesses that build custom software, confirm clear ownership of the code. Check for any employee or contractor agreements assigning IP to the company. Watch out for “forklift” solutions where open-source code was improperly integrated into proprietary products. If the company sells software licenses, examine maintenance and support agreements carefully. Unpaid royalties or third-party claims on code can become post-deal liabilities.
Hidden Costs and Tech Debt
- Technical Debt: This is the backlog of software bugs, deprecated code, and postponed upgrades that the target has deferred. Technical debt often lurks unseen until after a deal. According to an IDC survey, 47% of IT leaders cite excessive technical debt as a major factor driving IT budget overruns. In due diligence, ask engineering leadership for a list of planned refactors, end-of-life platform replacements, and other “should-fix” items. PE firms should estimate how much work remains to bring systems up to date – as neglected code can slow down future development and incur extra support costs.
- Outdated Hardware and Maintenance: Confirm the age and warranty status of all critical hardware (servers, storage arrays, network gear, employee laptops). Outdated hardware is not only unreliable but also expensive to keep running. One report notes the average company spends nearly $3 million per year just maintaining obsolete systems. Check if any equipment is end-of-service; replacements might need a sizable capital spend. Also review maintenance contracts – expired or soon-to-expire support contracts could imply urgent renewal fees.
- Vendor Lock-In: Be alert for single-vendor dependencies that could inflate costs later. For example, if all applications run on a proprietary cloud or virtualization stack, migrating off it (or negotiating better rates) can be very expensive. Ask if there are alternate supply chains. Similarly, long-term SaaS agreements (e.g. CRM, PLM, industry-specific tools) should be scrutinized: high early-termination fees or price-lock clauses can become surprises. In some cases, negotiating an exit from a lock-in before closing can improve valuation.
- Human Capital and Outsourcing: Note if the target relies on key individuals or outsourced providers for IT operations. A skeletal IT staff or sole engineer can be a hidden risk. After acquisition, you may need to hire or contract additional expertise, especially if the firm was under-resourced. Many PE portfolios mitigate this by engaging MSPs. For instance, leveraging a managed IT partner such as LG Networks can quickly fill skill gaps, standardize IT across the company, and provide ongoing support. This ensures critical infrastructure and security needs are met without the company bearing all headcount costs.
Finally, remember that tech due diligence is not just a checklist to tick off – it’s about quantifying risks and remediation costs to make an informed deal. For each bullet above, assign “action items” such as penetration tests, third-party audits, or update projects. In many cases, partnering with a specialized IT services firm can both uncover hidden issues and implement solutions. LG Networks, for example, offers managed IT and security services that help PE-backed businesses modernize infrastructure, shore up compliance, and keep systems running smoothly.
By rigorously evaluating IT infrastructure, cybersecurity, licensing, and hidden costs, PE firms can avoid nasty surprises and protect the deal’s value. Conducting thorough tech due diligence with the right expertise ensures that post-acquisition integration is smoother, technology-driven growth is possible, and the portfolio company’s earnings aren’t eaten by “plain-vanilla” tech failures.
