The LP's Due Diligence Template: 20 Questions to Ask Any SMB Fund or Operator

By Sean Smith & Nick Bryant

TL;DR — We've distilled our experience evaluating hundreds of SMB fund and operator opportunities into a structured 20-question due diligence framework. Organized into four categories — Operator Assessment, Deal Economics, Business Underwriting, and Governance — this template helps LPs quickly separate strong opportunities from risky ones.

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Why LPs Need a Structured DD Framework

The SMB acquisition space is booming. With $7.4 trillion in baby boomer small business assets transitioning over the next decade, more operators than ever are raising capital from LPs to acquire small businesses. But not all deals are created equal.

Unlike institutional private equity, where LPs rely on established fund track records and standardized reporting, SMB investing often involves first-time operators, non-standard deal structures, and limited institutional infrastructure. This makes rigorous due diligence essential — but many LPs don't know where to start.

If you are new to SMB investing entirely, start with our primer on getting started with alternative investments in small businesses before diving into this framework. We built this framework after reviewing hundreds of operator pitch decks, attending dozens of LP advisory committee meetings, and analyzing the common patterns behind both successful exits and painful losses.

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The Four Categories

Our framework organizes due diligence into four categories, each containing five essential questions:

1. Operator & Team Assessment (Questions 1–5)

The operator is the single biggest determinant of success in SMB investing. Unlike large-cap PE where institutional infrastructure supports the investment, SMB deals live and die by the operator's ability to source, close, and grow a business.

Key questions include evaluating the operator's professional background, prior acquisition experience, personal capital at risk, advisory team quality, and 100-day post-close plan. For a deep dive on what makes a great operator, see our guide on what to look for in a search fund operator.

Benchmark: The best operators we've backed invested 10-25% of their personal net worth and had detailed, written 100-day plans before closing.

2. Deal Economics & Structure (Questions 6–10)

Entry multiple and capital structure are the two biggest drivers of LP returns. Data from the Citrin Cooperman Independent Sponsor Report shows that 64% of independent sponsor deals close at 4-6x EBITDA — a sweet spot that balances value with quality.

This category covers purchase multiple benchmarking, capital structure analysis, investor terms (preferred return, step-up, put options), fee structures, and exit planning. For more on fee structures specifically, read our breakdown of SMB private equity fee structures.

Benchmark: Self-funded search deals at 3-5x EBITDA with SBA financing at 50-80% of deal value and 1.5x+ DSCR represent the strongest risk-adjusted profile.

3. Business & Underwriting (Questions 11–15)

Even the best operator can't overcome a fundamentally flawed business. This category ensures you're underwriting real earnings, understanding concentration risks, and stress-testing the financial model.

Third-party Quality of Earnings (QoE) validation is non-negotiable. Customer concentration above 15% for any single customer demands careful analysis and mitigation planning. We also cover industry assessment and scenario modeling. For a broader framework, see our piece on how to evaluate an SMB fund.

Benchmark: The Stanford Search Fund Study shows that 74% of search fund exits returned 3x+ to investors — but only when fundamental business quality was sound.

4. Governance & Reporting (Questions 16–20)

Governance is the most overlooked category in SMB investing. Many LPs focus entirely on the deal and operator, neglecting the structural protections that matter most when things don't go to plan.

This covers information rights, protective provisions, material decision frameworks, LP advisory committee structure, and conflict-of-interest policies. For a broader perspective on managing risk as an LP, see our guide on SMB investment risk management for LPs.

Benchmark: The best-run SMB funds provide monthly financials within 30 days, quarterly investor letters, and annual audited statements — with an investor portal for real-time access.

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How to Use This Template

1. Before the first meeting: Review the operator's materials against Questions 1-5 and 6-10. You should be able to answer most of these from a well-prepared pitch deck or CIM.

2. During diligence: Questions 11-15 require access to financial data, QoE reports, and management presentations. These are your deep-dive questions.

3. Before committing capital: Questions 16-20 should be addressed in the investor legal documents (LPA, side letter, subscription agreement). Don't skip these.

4. Scoring: For each question, rate the opportunity on a 1-5 scale. Any score below 3 on Questions 1, 3, 6, 7, or 11 should be a dealbreaker.

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The Bottom Line

Structured due diligence isn't about finding reasons to say no — it's about building conviction to say yes. The best operators welcome rigorous questions because they've already done the work to have strong answers.

If you're evaluating SMB fund or operator opportunities and want access to the complete template with scoring rubrics and detailed benchmarks, download the full due diligence template.

For a foundational understanding of the self-funded search model, start with our guide to self-funded search investing and the comprehensive Foundational Guide to Self-Funded Search Investing.

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Want to apply this framework to real deal flow? Join the SMB Investor Network to access vetted opportunities and connect with experienced LPs.