Module 3.2: PE Due Diligence for Technology
Technology assessment through the PE lens: engineering health, team retention, technical debt as deal currency, and the first 100-day post-acquisition plan.
Lesson 1: The PE Technology Lens
Private equity firms evaluate technology through a financial lens: what does the technology portfolio cost, what value does it generate, and what risks threaten value creation during the hold period?
PE firms model technology like any other asset: acquisition cost (build investment), depreciation (technical debt accumulation), maintenance cost (ongoing engineering), and replacement value.
A typical PE hold is 3-7 years. The technology must survive and improve during this period. If Technical Insolvency Date falls within the hold period: deal risk.
Technology quality directly impacts exit multiples. Clean technology with strong engineering metrics commands 1-3x higher revenue multiples.
For a hypothetical acquisition target: estimate technology age, calculate Innovation Tax, and project whether TID falls within a 5-year hold period.
Lesson 2: Engineering Team Assessment
The team IS the technology. PE due diligence must assess team capabilities, retention risks, and key-person dependencies. Losing critical people post-acquisition can destroy value.
Identify people whose departure would significantly impact velocity or institutional knowledge. If > 3 key persons: acceptable. If 1-2: critical single points of failure.
Average tenure indicates stability. Industry average: 2.5 years. Below 1.5 years: high churn risk. Above 3 years: stable but watch for stagnation.
How quickly can the company hire engineers? Time-to-fill for engineering roles indicates employer brand strength and market competitiveness.
Create a key person dependency map for your engineering org. For each key person: list critical knowledge areas, identify backup personnel, and estimate rehiring cost.
Lesson 3: Technical Debt as Deal Currency
In M&A, technical debt is a negotiation lever. Quantified debt reduces purchase price; a remediation plan with clear ROI can be funded from hold-period capex.
Total technical debt cost = (estimated remediation effort × burdened engineer rate) + (velocity loss during remediation × opportunity cost). This is your "debt discount" on the purchase price.
PE firms want a clear technology roadmap for the first 100 days post-acquisition. Critical fixes, team stabilization, quick wins. Demonstrates competence and reduces risk perception.
How will technology improvements drive enterprise value? Faster feature delivery → more revenue. Lower infrastructure costs → better margins. Better architecture → higher multiples.
Create a 100-day technology plan for a hypothetical PE acquisition: assessment (30d), stabilization (30d), and value creation quick wins (40d). Include budget estimates.