A Searcher's Guide to Technical Due Diligence

If you're running a search fund or doing entrepreneurship through acquisition, your diligence process probably covers financials, customers, legal, and operations in detail. Technology? Usually it's an afterthought — a quick look at what software the business uses and whether the website works.

That's a mistake. Technology due diligence in the lower middle market isn't about finding tech risk (most of these businesses barely use technology). It's about sizing the opportunity. The gap between how the business operates today and how it could operate with modern systems and automation is where a significant portion of your post-acquisition value creation lives.

Here's what to actually look for.

Why Technical Diligence Matters More Than You Think

Most businesses in the $1M-$5M SDE range run on a combination of QuickBooks, Excel, email, and institutional knowledge. That's not a problem — it's an opportunity. But you need to understand the current state to estimate:

• How much operational improvement is realistic in the first year
• What it will cost to modernize (time, money, disruption)
• Where the biggest efficiency gains are hiding
• What risks exist in the current setup (data loss, single points of failure, compliance gaps)

A business that looks operationally similar to a comparable deal might have a completely different technology foundation. That difference changes your model.

The Technical Diligence Checklist

Software Inventory

Request a complete list of every software tool the business pays for. Include the tool name, what it's used for, monthly/annual cost, and who uses it. This is the fastest way to understand the technology landscape.

What you're looking for:

• Cloud-based vs. on-premise software. Cloud is good — it means updates, backups, and API access are handled. On-premise means you're responsible for maintenance, security, and eventually migration.
• Integration between systems. Do the CRM, accounting, and operational tools talk to each other, or is someone manually exporting CSVs and re-entering data?
• Contract terms. Are you locked into multi-year agreements? What happens to licensing when ownership changes?
• Shadow IT. Tools that individual employees use but that aren't officially sanctioned — personal Dropbox accounts, WhatsApp for customer communication, personal email addresses for business correspondence.

Common pitfall: The seller will give you a short list. The actual list is always longer. Ask employees directly what tools they use day-to-day.

Data Quality and Accessibility

Data is the raw material for any post-acquisition automation. If the data is bad, everything you build on top of it will be unreliable.

What to request:

• A sample export from their CRM (or whatever they use to track customers). Look at completeness: are email addresses, phone numbers, addresses, and purchase history populated? Or is it 30% blank fields?
• Their chart of accounts and a sample P&L from their accounting system. Is it well-organized or a mess of miscategorized transactions?
• Any operational data they track — service tickets, project records, inventory counts. What format is it in?

What you're looking for:

• Completeness. Gaps in customer data mean you'll spend months cleaning it up before you can use it.
• Consistency. Are records formatted the same way? Or does "John Smith" show up as "Smith, John" and "J. Smith" and "john smith" in different systems?
• History. How far back does usable data go? More history means better trend analysis and more training data for AI models.
• Exportability. Can you get data out of their systems? If it's locked in proprietary software with no export function, that's a real problem.

Process Mapping

Before you can automate anything, you need to understand how work actually gets done. Not how the owner says it gets done — how it actually happens on the ground.

How to do this:

• Shadow employees for a day. Watch them work. Take notes on every step of their core workflows.
• Ask each person: "Walk me through what happens when [a customer places an order / you receive a service request / a new employee starts]."
• Ask: "What's the most annoying or repetitive part of your job?" This question surfaces automation opportunities faster than anything else.

What you're looking for:

• Manual handoffs between people or systems (someone printing an email and walking it to another department)
• Repetitive tasks that follow clear rules (data entry, scheduling, follow-up emails, report generation)
• Bottlenecks where work queues up because one person or one system can't keep pace
• Workarounds that people have created because the official process doesn't work

Communication Systems

How the business communicates — internally and with customers — is often the most operationally significant technology decision they've made (or more commonly, haven't made).

What to evaluate:

• Phone system. Is it a modern VoIP system or a landline? Can calls be recorded, transcribed, and routed? Call data is valuable for training AI systems and measuring service quality.
• Email. Is the business on Gmail/Google Workspace, Outlook/Microsoft 365, or something else? Are there shared inboxes for customer-facing functions, or does everything go to personal addresses?
• Customer communication. How do customers typically reach the business? How quickly do they get a response? Is there any tracking of response times or communication volume?
• Internal communication. Slack, Teams, group texts, or just yelling across the office? This affects how quickly you can deploy new workflows.

Website and Digital Presence

For most lower middle market businesses, the website is basic — and that's fine. But look at it as a lead generation and customer service asset.

What to evaluate:

• Does the website generate leads? Is there a contact form, and does it go somewhere useful?
• Is the site on a modern platform (WordPress, Squarespace, etc.) or something ancient that will need to be rebuilt?
• Does the business show up in Google search for relevant terms? Basic SEO presence matters for service businesses.
• Are there any digital marketing systems in place — email marketing, social media scheduling, review management?

IT Infrastructure and Security

This is less exciting but can hide real costs and risks.

What to evaluate:

• How is data backed up? If the answer is "it isn't" or "on a hard drive in the office," that's a risk you need to price in.
• Who has access to what? Are there shared passwords? (Usually yes.) Is there any access control?
• Has the business ever had a data loss incident, security breach, or extended system outage?
• What would happen if the main computer/server died tomorrow? How long would it take to be back up and running?

Red Flags That Should Change Your Model

Some findings during technical diligence should directly affect your valuation model:

Legacy system dependency. If the business runs on a critical piece of software that's no longer supported or maintained, budget $50K-$200K for migration. This is real money that reduces your effective purchase price.

No digital customer records. If customer information is primarily in paper files or the owner's personal contacts, you're looking at a significant data migration project before you can do anything. This also means the customer relationships are riskier to transfer.

Single point of failure. If one person (employee or contractor) is the only one who understands a critical system or process, that's a risk. If they leave, you're stuck. Assign a dollar value to that risk in your model.

Compliance gaps. If the business handles sensitive data (customer health records, financial information, PII) and has no security controls, you may need to invest in compliance before you can grow.

Green Flags That Increase Your Conviction

Modern cloud tools already in use. Even basic adoption of tools like Google Workspace, modern CRM, or cloud accounting means the foundation is there. Building on existing cloud infrastructure is dramatically cheaper than starting from scratch.

The team wants better tools. If employees are frustrated by manual processes and excited about the possibility of better systems, your automation deployment will go much smoother.

Clean, exportable data. A business that can produce a clean customer list, historical sales data, and operational metrics on request is giving you the raw materials for immediate AI deployment.

Process consistency. If different employees handle the same task the same way, the process is implicitly documented — even if nobody's written it down. Consistent processes are easy to automate.

What to Include in Your LOI

Based on your technical diligence, consider including these provisions in your letter of intent:

• Transition support for technology systems. Specify the number of hours the seller will spend helping you understand and transition all technology tools, accounts, and passwords.
• Data transfer. All customer data, vendor contacts, historical records, and operational data transfer to the buyer at close.
• Software license transfer. Clarify which software accounts transfer, which need new subscriptions, and the timeline for the transition.
• Contractor/vendor introductions. If the business uses IT contractors, web developers, or other technology vendors, include introductions as part of the transition.

The Bottom Line

Technical due diligence in the lower middle market isn't about evaluating code or auditing server infrastructure. It's about understanding the operational reality of the business — what's manual, what's automated, and how much leverage you can create with modern technology after close.

The best searchers treat this as a value creation assessment, not a risk assessment. The question isn't "is the technology good enough?" It's "how much better can I make it, how fast, and what's that worth?"

If you'd like help conducting a technical assessment on a business you're evaluating, let's talk.