We have relied on customized open-source software and loose software licensing agreements to scale our operations cheaply. Our M&A advisor warns that this technical debt will hurt our valuation during tech due diligence. What operational steps must we take to clean up our code and licensing before we go to market?

Question

Tyler Smith · Accepted Answer

Technical debt is a silent valuation killer. Sophisticated buyers will bring in specialized IT consultants to audit your code base, software architecture, and licensing agreements. If they find unmapped open-source libraries with restrictive licenses or poorly documented code, they will demand a direct reduction in the purchase price to cover the cost of remediation.

You must systematically address this liability before you launch your sale process. Begin by conducting an internal software asset inventory. Map every software application, API, and open-source component used in your operations. Identify any licenses that carry copyleft provisions, which could force you to open-source your proprietary code.

Next, prioritize your remediation efforts based on the risk level. Focus first on cleaning up any code that is critical to your core product or service delivery. Document your software architecture and create clear API documentation. Ensure that all developer contracts explicitly state that all intellectual property is owned entirely by the company.

If you find significant technical debt that would take too long to resolve, be transparent about it. Prepare a detailed remediation plan and a realistic cost estimate. Showing a buyer that you have identified the issues and have a clear plan to address them is far better than having their auditors discover them during due diligence.