N9-5: PE Due Diligence: Tech Debt Assessment
How private equity and corporate acquirers evaluate technical debt risk before signing the LOI.
🎯 What You'll Learn
- ✓ Run pre-LOI scans
- ✓ Identify deal breakers
- ✓ Calculate debt-adjusted valuations
- ✓ Structure remediation holdbacks
Lesson 1: The Pre-LOI Technical Scan
Before the Letter of Intent, sophisticated PE buyers run a rapid technical assessment: 48-72 hours, focused on three things — deployment frequency (velocity proxy), production incident rate (stability proxy), and maintenance load percentage (debt proxy). These three numbers tell the story.
Daily deployments suggest modern CI/CD and low debt. Weekly suggests friction. Monthly suggests crisis.
Severity 1 incidents per month. More than 2/month signals unstable systems.
Sprint allocation to maintenance vs features over last 4 quarters.
Run a simulated pre-LOI scan on your own organization. Grade yourself: green (<20% maintenance), yellow (20-40%), or red (>40%).
Lesson 2: Deal-Breaker Identification
Five technical debt findings that kill deals: (1) Zero automated test coverage on revenue-critical paths, (2) single-point-of-failure architecture, (3) key-person dependency on <3 engineers, (4) unpatched CVE backlog >6 months, (5) legacy stack with no migration plan. Any one of these can reduce the bid by 20% or kill the deal entirely.
No automated tests on checkout/payment/auth flows.
Single database, single server, no redundancy.
Known security vulnerabilities unpatched for >6 months.
Audit your codebase for the 5 deal-breaker signals. Document each finding with severity and remediation estimate.
Lesson 3: Debt-Adjusted Valuation
The debt-adjusted valuation model: Start with standard EBITDA multiple → subtract remediation costs → subtract 12-month carrying costs → apply risk discount for uncertainty. A company trading at 10x EBITDA with $3M in tech debt remediation costs and $800K in annual carrying costs is really worth 10x × (EBITDA - $800K) - $3M.
One-time cost to fix debt subtracted from enterprise value.
Annual debt maintenance cost reduces the EBITDA used in the multiple.
5-15% additional discount for uncertainty in remediation estimates.
Calculate the debt-adjusted valuation for a hypothetical $50M revenue company with 45% maintenance load and $4M in remediation costs.
Continue Learning: Track 9 — Technical Debt as Financial Liability
2 more lessons with actionable playbooks, executive dashboards, and engineering architecture.
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Module Syllabus
Lesson 1: Lesson 1: The Pre-LOI Technical Scan
Before the Letter of Intent, sophisticated PE buyers run a rapid technical assessment: 48-72 hours, focused on three things — deployment frequency (velocity proxy), production incident rate (stability proxy), and maintenance load percentage (debt proxy). These three numbers tell the story.
Lesson 2: Lesson 2: Deal-Breaker Identification
Five technical debt findings that kill deals: (1) Zero automated test coverage on revenue-critical paths, (2) single-point-of-failure architecture, (3) key-person dependency on <3 engineers, (4) unpatched CVE backlog >6 months, (5) legacy stack with no migration plan. Any one of these can reduce the bid by 20% or kill the deal entirely.
Lesson 3: Lesson 3: Debt-Adjusted Valuation
The debt-adjusted valuation model: Start with standard EBITDA multiple → subtract remediation costs → subtract 12-month carrying costs → apply risk discount for uncertainty. A company trading at 10x EBITDA with $3M in tech debt remediation costs and $800K in annual carrying costs is really worth 10x × (EBITDA - $800K) - $3M.