Introducing Quality of Tech (QoTTM ) and why it is the New Battleground for Private Equity
The value creation playbook for Private Equity has fundamentally changed. Today, true alpha is found in operational transformation, and at the heart of that transformation lies in technology. In this post, we explore why 2026 mandates a unified view of “Earnings” and “Technology”, moving from red flags to “Tech Adjusted EBITDA.”
This is the premise of Quality of Tech (QoTTM ) – a framework that moves far beyond the traditional IT audit to treat tech as a critical financial asset, or liability, in every deal. In my second book, Tech Equity, the idea of Tech Alphas was introduced, which emphasized that not all technology investments should be treated equally or have the same impact in increasing enterprise value. QoTTM takes this to the next level and establishes the new standard for understanding the financial impact of technology investments across the buy, hold, and sell investment lifecycle. In this post, we will explore how QoTTM is applied in action to several buy side due diligence transactions.
The Old Playbook vs. The New Reality
Historically, private equity due diligence focused on two main pillars:
• Quality of Earnings (QoE): Validating the historical financials.
• Commercial Due Diligence (CDD): Assessing market opportunities and growth potential.
Technology? It was often a quick check on infrastructure, licenses, and maybe a glance at a custom codebase. The assumption was that “IT works” or “we’ll fix it later.”
But “later” is now. In 2026, technology dictates scalability, integration potential, and the very speed at which a company can innovate and capture market share. Failing to rigorously assess QoTTM is like buying a house without checking its foundation —you might get a great deal on the surface, but you’re inheriting catastrophic hidden costs.
QoTTM in Action: Real-World Due Diligence Examples
Let’s look at how QoTTM uncovers deal-making insights that traditional diligence misses:
Example 1: The “Buy-and-Build” Integration Nightmare
- The Scenario: A PE firm is acquiring a regional HVAC service provider with a strong brand and plans to execute an aggressive “buy-and-build” strategy, rolling up smaller players to create a national platform.
- Traditional Diligence: QoE looks good, strong customer base, attractive local markets. CDD confirms a fragmented industry ripe for consolidation.
- The QoTTM Lens: A deep dive into the target’s core Service Management Software reveals it’s a heavily customized, on-premises system built 15 years ago. It has no open APIs, relies on proprietary databases, and can’t easily import data from other systems.
- The QoTTM Impact: Every bolt-on acquisition will require a manual, expensive, and slow data migration process, delaying synergy realization and extending the hold period. The firm quantifies this as a $2M CapEx investment to build an integration layer or replace the system and a $500K annual OpEx for manual data consolidation across disparate systems – a direct hit to projected IRR that informs a purchase price adjustment.
Example 2: The SaaS Platform with “Innovation Paralysis”
- The Scenario: A growth equity firm is looking at a promising SaaS company with high recurring revenue and a strong customer logo list. Their investment thesis hinges on rapid new feature development and expansion into adjacent markets.
- Traditional Diligence: Revenue growth is strong, churn is low, and customer testimonials are glowing. The sales team is excellent.
- The QoTTM Lens: A review of the codebase health and development processes reveals critical issues. The product is built on a “monolithic” architecture with high “technical debt” (poorly documented code, outdated libraries). The engineering team spends 70% of its time on bug fixes and maintenance, with only 30% on new feature development.
- The QoTTM Impact: The company is paying for a full engineering team but only getting a fraction of their output. The investment thesis—rapid feature expansion—is at severe risk. The QoTTM assessment quantifies this as a $1.5M annual incremental OpEx on the R&D budget and a $3M CapEx for architectural refactoring to enable true agility. The firm demands a robust 100-day plan for addressing this before closing the deal.
Example 3: The Untenable “Single Point of Failure”
- The Scenario: A lower middle market PE firm is evaluating an e-commerce brand with impressive direct-to-consumer sales and strong brand loyalty.
- Traditional Diligence: Financials show excellent unit economics. Commercial diligence highlights a passionate customer base and effective marketing.
- The QoTTM Lens: The QoTTM assessment reveals that the entire e-commerce platform’s core logic and crucial integrations were built by a single, freelance developer who left the company 18 months ago. There is minimal documentation, and current internal developers are afraid to touch certain parts of the system for fear of breaking it.
- The QoTTM Impact: This is a massive “Key Person Risk” and a clear sign of “Organizational Tech Debt.” The company is effectively held hostage by an undocumented, fragile system. Any major change or unexpected issue could lead to significant downtime and revenue loss. The firm identifies a $750K CapEx to re-document the system and implements proper developer onboarding processes, ensuring the business isn’t a single point of failure.
The Mandate for Modern Private Equity
These examples illustrate why QoTTM is no longer optional. It’s an integral part of de-risking deals, optimizing value creation during the hold period, and protecting your exit multiples.
The most successful GPs in 2026 aren’t just looking at the “earnings” of an acquisition; they’re looking under the hood. They understand that the true enterprise value of today’s companies is inextricably linked to the quality, scalability, and maintainability of their technology.
In my next post, we will introduce you to our proprietary 12-Point QoTTM Diagnostic which rapidly assesses a target company’s technology maturity across four critical domains (Risk, Financial Quantification, Scalability, and Talent) to deliver an actionable QoTTM Score.
Are you ready to truly understand what you’re buying?
Michael Fillios
Michael C. Fillios is the founder and CEO of IT Ally, a business and technology advisory firm for family owned and private equity backed small- and medium-sized businesses (SMBs). He is a former Fortune 500 global CIO, small business CFO, technology entrepreneur and management consultant with more than 25 years of experience. His first book, Tech Debt 2.0®: How to Future Proof Your Small Business and Improve Your Tech Bottom Line, was published by the IT Ally Institute in April 2020. His new book is, Tech Equity, How to Future Ready Your Small Business and Outperform Your Competition (IT Ally Institute, May 4, 2023). Learn more at itallyllc.com.
