Beyond the EBITDA multiple: a practitioner’s guide to uncovering value and risk in tech M&A due diligence

In the high-stakes world of private equity, the success of a technology acquisition hinges on seeing what others miss. While financial statements are scrutinized and growth models are built, the reality is that traditional due diligence often only scratches the surface. True value—and the hidden risks that can erode it—is buried deep within a company’s product strategy, its technological architecture, its complex partner ecosystem, and its day-to-day operational realities.

The greatest challenge is piercing the veil of the management’s carefully crafted narrative to uncover the ground truth. This requires more than a checklist; it demands a practitioner’s lens, sharpened by years of C-suite experience in managing technology companies, scaling products globally, and reporting to investors. This guide provides a practical framework for a rigorous, operational due diligence process that not only reveals the true state of a target company but also highlights how an external consultant can be a crucial ally in navigating this complex landscape.

Deconstructing the go-to-market and product strategy

An investment thesis is often built on a compelling product story. The first and most critical task is to rigorously pressure-test that narrative. It is common to discover that market analysis presented by management is not based on objective data but is instead a projection designed to downplay the need for significant innovation or investment.

An external expert must independently dissect the strategy, identifying crucial gaps and unaddressed risks:

• Segment strategy & market reality: a deep dive into customer segments is essential. A common oversight is the lack of a coherent strategy for a large but challenging segment, such as micro and small businesses, which can represent a vast, untapped market.
• Cloud transition – myth vs. reality: the transition to the cloud is a central theme in today’s software market. An expert must determine if the target’s cloud strategy is merely a marketing slogan or a well-defined plan in execution. It is vital to assess if the company is only in the “planning” stage or possesses a concrete roadmap with defined technologies, costs, and timelines.

Assessing technological viability and uncovering hidden debt

A functionally sound product can often mask significant technological debt that will inevitably hinder future growth, scalability, and profitability. An external consultant with a deep technical background is indispensable for evaluating the true state of the technology stack.

• Architecture, stack, and cloud readiness: An investigation must determine if products are built on obsolete desktop technologies and expensive licensed components (e.g., MS SQL Server), which create dependencies and inflate costs. The consultant’s primary role is to accurately assess the real effort and cost required for a cloud migration—clarifying if it’s a simple porting or a complete, multi-year system refactoring.
• R&D capabilities and efficiency: The size, structure, and cost of the R&D team can be a major red flag. An R&D team of only 50 full-time employees may be dangerously insufficient for maintaining existing products while also driving essential technological innovation. An external advisor should analyze whether the R&D team’s compensation is adequate to attract senior talent and if centralizing the team in a high-cost location is strategically sound.

Analyzing the competitive and partner ecosystem

No company operates in a vacuum. A comprehensive due diligence process requires an unbiased view of the competition and a thorough understanding of the critical—and often perilous – partner channel.

• Competitive landscape: management’s analysis of its competition must be challenged and independently verified. A consultant should confirm if competitors’ cloud solutions are accurately represented. For instance, a competitor’s hosted application with a web GUI provides the same user experience as a “true cloud” solution from the customer’s point of view.
• Dependency on partners: when a significant portion of revenue (e.g., 50%) originates from partners, it constitutes a major, often underestimated, risk factor. An external consultant’s role is to dig deep into this dependency. Key questions that must be answered include:
  • are essential cloud modules developed by third-party companies, creating a risk that partners, not the target, truly “own” the customer relationship?
  • what are the partners’ margins, and does a subscription model—often key to the investment thesis—create a channel conflict that could jeopardize revenue?
  • what percentage of a partner’s total revenue comes from the target’s licenses versus their own services? If it’s a low figure (e.g., 10%), the target’s product could be easily replaceable, posing a significant churn risk,
  • are there churn statistics that compare the direct sales channel to the partner channel?

A deep dive into financials and operational reality

Finally, a consultant must push beyond aggregated financial data to understand the true drivers of profitability and operational efficiency. It is critical to verify if a robust internal controlling system is in place that can accurately show the profitability of individual products, projects, and customers.

The consultant should demand granular data to answer foundational questions:

• What is the true profitability of each sales channel, product, and customer segment?
• Is the company heavily reliant on upselling existing clients, and is there a significant risk of churn, especially when migrating customers from older, obsolete products?
• Are detailed financial analyses available for each product based on actual costs rather than averaged or misleading allocations?

From due diligence to dominance: building the post-acquisition blueprint

A rigorous, practitioner-led due diligence process achieves far more than just identifying risks; it lays the essential foundation for the post-acquisition value creation plan. By uncovering technological debt, clarifying the competitive landscape, untangling partner dependencies, and revealing true segment profitability, it provides the private equity owner with a clear, actionable roadmap from day one. This transformative approach moves the conversation from simply accepting a curated narrative to building a powerful, data-driven strategy based on operational and technological ground truth.