The Top 5 Security Red Flags That Kill Deals

When you're preparing to sell your SaaS company, security is one of those areas that can sink you fast. Buyers don’t expect perfection, but they do expect discipline. When they see sloppy or dangerous practices, they immediately start thinking about liability, regulatory fines, customer churn, and headlines they don’t want to be associated with.

I've seen situations where security issues chopped millions off valuations, and others where a buyer simply walked away. These are the five red flags that consistently cause trouble.

1. Unprotected Card Payment Data

If you’re storing or transmitting raw credit card data, you’re setting yourself up for disaster. I’ve come across companies that had card numbers sitting in their database because they thought it would be easier to manage recurring billing that way. The problem is obvious: it opens you up to PCI compliance failures, massive regulatory exposure, and the risk of becoming tomorrow’s data breach headline. The expectation in diligence is that payments are handled through a provider like Stripe, Braintree, or Adyen, where all sensitive data is tokenized and kept off your systems. Anything else looks reckless, and buyers won’t take that risk on.

2. No Security Infrastructure or Testing

One of the fastest ways to lose credibility in diligence is when buyers realize you don’t have any real security infrastructure in place. I’m not talking about a SOC 2 badge on your website — I mean the basics that show you’re actively protecting your systems. If there’s no web application firewall in front of your app, no penetration testing or vulnerability scans, and no monitoring tools watching for intrusion attempts, it’s a clear signal that security hasn’t been a priority.

For SaaS companies in sensitive industries like healthcare or finance, this is especially glaring, but even in less regulated markets it still matters. Buyers don’t expect you to have enterprise-grade security like a Fortune 500, but they do expect to see that you’ve implemented the fundamentals. The absence of these controls tells them that if someone really wanted to compromise your system, they probably could — and that means they’ll either discount your valuation or walk away entirely.

3. Known Vulnerabilities With No Path to Remediate

Every SaaS company has vulnerabilities. The difference between a red flag and a non-issue is whether you have a plan to address them. When a scan turns up dozens of high-severity CVEs that have been sitting untouched for months, it looks like you don’t care. When buyers see unsupported databases or frameworks that can’t even be patched, it suggests you’ve kicked the can down the road for too long. What’s worse than the vulnerabilities themselves is a lack of process — no vulnerability management discipline, no remediation roadmap, no owner. That sends a message that security is reactive, not proactive, and buyers don’t want to inherit that risk.

4. History of Intrusion

A past breach doesn’t automatically kill a deal, but how you handled it often does. If you’ve had intrusions and didn’t disclose them, or if your response was slow and uncoordinated, buyers start imagining worst-case scenarios. I’ve seen diligence uncover incidents that were brushed aside internally, only to resurface as major liabilities. In regulated industries, a failure to report can compound the problem with legal exposure. The key here is transparency. If you’ve been through an incident, own it, show what you did to contain it, and explain how your processes have improved since. Trying to hide it almost always backfires, and when buyers find out you weren’t upfront, trust is gone.

5. No Disaster Recovery Plan

Security isn’t only about prevention — it’s about resilience when something goes wrong. The absence of a disaster recovery plan is one of the biggest operational red flags in diligence. If you can’t answer the basic question, "What happens if we lose our primary database or cloud region?" you’re in trouble. I’ve seen companies that had backups but never tested them, only to find out they were useless when it mattered. I’ve seen others where the entire recovery plan lived only in the CTO’s head. Buyers hear that and immediately see risk: extended outages, angry customers, lost revenue, and brand damage they’ll have to clean up. A written, tested recovery plan doesn’t have to be perfect, but not having one at all is a signal of immaturity.

Wrapping It Up

These five red flags — unprotected card payment data, no security infrastructure, unresolved vulnerabilities, a history of intrusion, and no disaster recovery — are the issues that consistently derail diligence. They aren’t hypothetical; they’re the real findings that cut valuations and kill deals.

If you’re thinking about an exit, the move is to get in front of them now. Push payments to a provider and purge cardholder data from your systems. Put basic security infrastructure in place so buyers see that you’ve invested in real protection. Clean up vulnerabilities and document your remediation process. Be transparent about past incidents. And most importantly, have a disaster recovery plan that isn’t just a theory.

Buyers don’t expect you to run security like a Fortune 500. They do expect discipline, visibility, and a clear path forward. If you can show that, security becomes an asset instead of a liability.When you're preparing to sell your SaaS company, security is one of those areas that can sink you fast. Buyers don't expect perfection, but they do expect discipline. When they see sloppy or dangerous practices, they immediately start thinking about liability, regulatory fines, customer churn, and headlines they don't want to be associated with.

I've seen situations where security findings chopped millions off valuations, and others where a buyer simply walked away. These are the five red flags that consistently cause trouble, what they look like in the real world, and how to get in front of them before diligence starts.

1. Unprotected card payment data

If you're storing or transmitting raw credit card data, you're setting yourself up for disaster. I've come across companies that kept card numbers in their database because they thought it would make recurring billing easier. It might feel convenient, but it pulls you into PCI DSS scope on the hardest mode and creates a single point of catastrophic risk. The expectation in diligence is simple: use a provider like Stripe, Braintree, or Adyen, tokenize everything, and keep primary account numbers off your systems entirely. That includes logs and analytics payloads. I still see requests and event streams where fields like "cardNumber" or "cvv" sneak through into log files. Buyers look for this, because it's a tell that security hasn't been a first-class concern.

The quick win is to shift to fully hosted payment fields or a vault that never lets sensitive elements traverse your app. Redact and hash aggressively, put log scrubbing in place, and rotate any secrets that have been exposed alongside payment data. If you already handled card data directly, show exactly how you're exiting that pattern and shrinking PCI scope. A credible de-scoping plan can keep a deal moving. Pretending it's fine won't.

2. No security infrastructure or testing

A fast way to lose credibility is when buyers realize you don't have any real defensive controls. I'm not talking about a policy binder. I mean running gear and repeatable testing that shows you actively protect the product. No web application firewall in front of the app, no rate limiting at the edge, no bot mitigation, no endpoint detection on production hosts, and no centralized logging or alerting tells a very clear story. On the testing side, no regular vulnerability scanning, no dependency scanning in CI, no static analysis on merge, no dynamic testing in a staging environment, and no third-party penetration test for the last 12 months sends the same message.

You don't need a Fortune 500 stack to satisfy buyers. You do need fundamentals: a WAF or CDN edge ruleset that blocks obvious abuse, MFA everywhere, SSO for admin consoles, centralized logs with retention and search, alerting tied to playbooks, and at least quarterly scanning plus an annual pen test from a reputable firm. Show me a dashboard that proves it's running, show me alert thresholds and who gets paged, and show me tickets from the last pen test that were closed with evidence. That's the level that calms people down in diligence.

3. Known vulnerabilities with no path to remediate

Everyone has vulnerabilities. What bothers buyers is when you know about them and don't have a plan. The classic pattern is a scanner report full of high and critical CVEs that have been open for months, running on top of an end-of-life framework or database. Equally common: SBOMs and dependency files that pin to versions with widely exploited issues, but no remediation timeline, no owner, and no exception process tied to business risk.

What good looks like is boring and convincing. You have SLAs by severity, you scan frequently enough to catch regressions, you patch on a predictable cadence, and you can show a living remediation tracker with due dates, assignees, and evidence of fix. For components that can't be upgraded immediately, you have temporary controls, compensating monitoring, and a documented exception that expires. If a library or runtime is truly end of life, I want to see a migration plan with milestones, not a shrug. Buyers are not grading you on zero findings. They're grading you on whether this problem will still be their problem six months after close.

4. History of intrusion

A past breach doesn't automatically kill a deal. How you handled it often does. If you've had intrusions and didn't disclose them, or if your response was slow and uncoordinated, buyers start imagining worst cases. I've seen diligence uncover incidents that were brushed aside internally and never fully remediated. That sets off a chain of questions: how long were attackers in the environment, what data was accessed, who was notified, what did you change, and how do you know it won't happen again.

The way through is transparency and rigor. Bring a clean incident timeline, with containment actions, eradication steps, recovery checkpoints, and the follow ups you completed. Show the root cause analysis and the specific controls you added as a result. If regulators or customers were in scope, show when and how you notified them. If forensics found gaps, show that you closed them. Buyers are comfortable with companies that learn and harden after an incident. They are not comfortable with companies that minimize, forget, or can't demonstrate lessons learned.

5. No disaster recovery plan

Security isn't only about keeping threats out. It's also about resilience when something inevitably goes wrong. The absence of disaster recovery planning is one of the biggest operational red flags in diligence. If you can't answer "What happens if we lose our primary database or our cloud region?" you're in trouble. I've seen companies with backups that had never been tested, only to learn that restore procedures didn't work under pressure. I've seen others where the entire recovery plan lived in the CTO's head and required three people who were no longer at the company.

Buyers want to see that you defined RPO and RTO targets that make sense for your customers, that you back up critical data on a reliable schedule, and that you practice restores. A straightforward pattern works: 3-2-1 backups, immutable or versioned copies, cross region replication for critical stores, runbooks for failover and restore, and periodic tabletop exercises with at least one hands on recovery drill per year. Document your dependencies and the order of operations to bring the product back. The point isn't perfection. It's demonstrating that downtime won't turn into days of guesswork and lost revenue.

Wrapping it up

These five red flags - unprotected card payment data, no real security infrastructure or testing, known vulnerabilities without a path to fix, a history of intrusion handled poorly, and no disaster recovery - are the ones that consistently derail diligence. They aren't hypothetical. They're the real findings that cut valuations, extend exclusivity periods, and make buyers nervous about post close surprises.

If you're thinking about an exit, get ahead of them now. Move payments to a provider and purge cardholder data from your systems and logs. Stand up basic defenses and monitoring that actually run 24x7 and can be demonstrated. Put a vulnerability management loop in place with SLAs and owners. Be honest about past incidents and show how you hardened after them. Write, test, and practice your recovery plan until it's muscle memory.

Buyers don't expect you to run security like a global bank. They do expect discipline, visibility, and a credible path forward. If you can show that, security becomes an asset instead of a liability and one less reason for a buyer to hesitate. Next up, we'll dig into cloud infrastructure costs - the hidden drag on valuation - and what buyers look for when they open your AWS or GCP bill.