Technical Debt and it's impact on business value.
Updated: Jun 11, 2020
Originally Posted - 2/16/16
"Technical Debt" was originally used to refer to the result of issues in Software Development projects, and I have written that Technical Debt occurs in IT Infrastructure as well.
At a fundamental level, think of "technical debt" in the same way you think of a bank overdraft facility providing working capital.
Ideally your business operates from cash flow, however over time you tap into the overdraft to cover an unforeseen expense, or to take advantage of a business opportunity. You rationalize that you will paying back the debt in full at the end of the month, only something happens to make the payment less than complete.
Over time, the overdraft or line of credit gets used and you carry more continuous levels of debt.
The same thing happens with IT Infrastructure.
Patches are skipped because of a busy project schedule,
Sytem Maintenance deferred
Service contracts not renewed
End User training skipped
Convenience trumps Security
End Of Life systems continue to be used
Now the time comes to sell the company.
Anyone performing due diligence will be provided with the companies financial documents, and will see the details of a bank loan. The outstanding balance of the overdraft / line of credit reduces the value of the company because the acquirer either has to use cash flow to pay the debt payments, or another loan to pay it off in its entirety.
The same is true of Technical Debt.
Appropriately understood and evaluated, identifying the levels of technical debt within a potential acquisition can have a material impact on the valuation of the company. MXL has spent many years evaluating IT infrastructure and developing strategies to minimize technical debt for a wide variety of customers and can provide assistance to folks on both the buy side and sell side of a transaction.
Acquirers - take a look at 5 Clues the company you are buying has a technical debt problem...
Sellers - take a look at 5 things to fix in the 12 months before you are sold...
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