TECHNICAL DEBT - THE UGLY UNDERBELLY OF BUYING A SOFTWARE BUSINESS
One of the greatest challenges in evaluating a software business, particularly one that has a number of years and a lot of miles behind it, is understanding where the bodies have been buried in the past.
Technical debt is the term that's been ascribed to having to pay for the sins of past product development. Unlike financial debt, however, technical debt is not usually a conscious decision. There is no moment where you say "I'm borrowing three days today in return for paying six days tomorrow." Furthermore, there's no clear way to calculate how much debt you've incurred and how long it will take to pay it off. It often accrues out of sight.
When you buy a software business, there is almost always trouble lurking. Even the most well-capitalized, well thought out products have issues that need to be fixed later. The business changes over time, people come and go, and it's easy to take shortcuts along the way.
In the next few posts, we'll explore the different kinds of technical debt, discuss how you as an incoming potential owner understand the amount of debt you're taking on, and finally how to think about paying the technical debt off.
As you search for and evaluate software businesses, fully understanding technical debt will help you prepare to face the challenges after you've acquired your company. Stay tuned!