By Nick Bryant
TL;DR: Ask seven questions about the operator, personal economics, pipeline, terms, financial diligence, liquidity assumptions, and reporting. The useful answer is a document, calculation, reference, or specific example. A confident presentation is not evidence that an investment will perform.
Put the research in context
Stanford's 2024 study reported a 35.1% aggregate pre-tax internal rate of return and a 4.5x return on invested capital for its historical U.S. and Canadian core search-fund population1. That is a pooled asset-class result, not an average deal, a forecast, or a benchmark for self-funded searches. The search fund study comparability guide explains how to check the population, period, metric, and exclusions before using a headline result.
Traditional and self-funded searches can also give investors different rights and enter the process at different times. Our comparison of search funds vs. traditional PE covers the broader structural differences. If private SMB investing is new to you, start with getting started with alternative investments.
These seven questions turn the discussion back to the opportunity in front of you.
1. What evidence supports the operator's readiness?
Ask the operator to map prior responsibilities to the work required after closing. Titles alone do not show whether someone owned a budget, hired managers, handled a customer loss, or made decisions with incomplete information.
Request concrete examples:
- A decision they reversed after new evidence emerged
- A missed target and the actions they took next
- A conflict between growth, cash, and team capacity
- A former manager and direct report who can verify the account
Ask each reference what the operator owned, how they handled bad news, and where they needed support. For a deeper operator review, see what to look for in a search fund operator.
2. What personal economics could shape the operator's decisions?
There is no universal personal-net-worth benchmark. Ask for the actual dollar amount the operator will invest, when it is funded, and what happens if more equity is required.
Then review the full compensation picture:
- Salary, bonuses, and benefits before and after closing
- Fees paid to the operator or an affiliated entity
- Equity vesting, dilution, repurchase, and forfeiture terms
- Personal guarantees or other obligations
- Whether any payment returns the operator's invested capital early
Personal capital can create exposure to the outcome. It does not prove judgment or remove conflicts created elsewhere in the terms.
3. What does the deal pipeline show?
Ask the operator:
- How many opportunities came from direct outreach and how many came through intermediaries?
- What period does the pipeline cover, and how are duplicate or inactive leads treated?
- How many letters of intent were submitted, and why did each process end?
- Which sectors, geographies, and business traits are inside or outside the search criteria?
Request the pipeline report or CRM summary behind the answer. Volume alone does not establish quality. The useful evidence is how the operator applies criteria, learns from failed processes, and protects time for the best-supported opportunities.
4. Which documents define the terms?
Terms vary across traditional searches, self-funded acquisitions, SPVs, and funds. Ask for the governing documents and trace:
- The security each investor receives
- Any preferred return, conversion, redemption, or step-up provision
- The distribution waterfall at different outcomes
- Management, transaction, monitoring, and organizational fees
- Voting, board, information, and consent rights
- Follow-on capital, dilution, and transfer provisions
Use a worked waterfall to test the language. If a summary and the legal documents disagree, the documents control. Questions about a live agreement may require qualified legal or tax advice.
5. What does the Quality of Earnings work establish?
Ask who commissioned the Quality of Earnings report, who performed it, and what period and entities it covers. Review the adjustments, cash reconciliation, revenue testing, working-capital analysis, and items excluded from scope.
A QoE can test how historical earnings were assembled. It does not guarantee that revenue will recur, customers will remain, working capital will be sufficient, or the operator's forecast will be achieved. Ask management and the provider which conclusions depend on seller-supplied information and which items remain unresolved.
6. What assumptions drive liquidity and distributions?
An exit model is not a required sale date. Ask which events could return capital, what lender or board approvals they require, and what happens if no transaction occurs on the modeled schedule.
Review:
- Cash retained for operations, taxes, reserves, and capital spending
- Debt amortization, covenants, and restrictions on distributions
- Assumed refinancing or recapitalization terms
- The valuation and buyer assumptions behind a modeled sale
- Investor rights if the holding period extends
The answer should separate a possible path from a contractual right.
7. What reporting and governance rights are written down?
Ask what investors receive, when they receive it, and how each metric is defined. A useful reporting package may include financial statements, cash and debt information, operating measures, budget variance, and a narrative about material changes. The correct package depends on the business and the governing documents.
Confirm who prepares the information, whether it is audited, reviewed, compiled, or management-produced, and what happens when a report is late. Also check board representation, inspection rights, consent rights, and the process for conflicts of interest.
Frequent reporting improves visibility. It does not predict returns or guarantee that the underlying information is complete.
Use the answers as an evidence map
These seven questions are a first screen. The LP Due Diligence Guide expands the review, and what is self-funded search investing explains where investors may enter that model.
For each answer, record the supporting document, source, date, and unresolved point. That record makes it easier to distinguish verified terms from assumptions in the investment memo.
