75 Due Diligence Questions to Ask Sponsors Before Partnering

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Key Takeaways

• Do due diligence on every sponsor to safeguard capital and mitigate risk.
• Ask vision, performance, objective, audience, operations, and ethics due diligence questions to ensure alignment with your investing objectives and risk tolerance.
• Check track records with specific metrics and third-party sources, and benchmark results against industry standards to identify discrepancies.
• Leverage processes, team roles, playbooks or templates to make sure you’re covering all the bases and clearly recording your findings and red flags.
• Keep an eye out for standard red flags, such as unresolved legal issues, high turnover, ambiguous ownership, or overly optimistic projections, and promptly investigate any blanks.
• Focus on sponsors willing to be transparent, communicative, and collaborative, sharing accountability for creating a long-term, value-based partnership.

Due diligence questions to ask sponsors assist investors and partners in evaluating both the project’s risks and the sponsor’s ability. They address track record, financial strength, governance, conflict of interest, and exit plans.

Thorough responses disclose expertise, sources of capital, term sheets, and backups. These due diligence questions help minimize risk and facilitate decisions when considering a partnership or investment.

The sections below enumerate targeted questions and describe why they are relevant in typical deal situations.

The Strategic Imperative

The strategic imperative brackets why due diligence is important and what you need to be asking prior to investing. It provides a transparent window into strategic objectives, management philosophy, focus areas, employee relations, and emerging challenges that impact value.

Investors and partners must map the sponsor’s stated strategy against observable facts: product mix, customer base, channel mix, margin drivers, and recent tactical moves. This mapping helps identify gaps between promises and probable outcomes and demonstrates if growth levers like wallet share, cross-selling, or upselling are feasible.

A targeted due diligence checklist underpins smarter decision making for passive investors and institutional partners alike. It should cover things like revenue concentration, margin profiles by product and channel, customer lifetime value, churn rates, and unit economics.

For instance, if upselling is the key growth strategy, confirm past upsell conversion rates, average order value increases, and which customers are the most responsive to higher margin offers. If channel mix is moving from direct to marketplace sales, examine the effect on take rates and margins. This detail allows purchasers to justify the forecasted revenue opportunity and establish achievable milestones to capture it.

The sponsor’s business model, management expertise and track record are table stakes. Ask for detailed bios tied to measurable outcomes: deals closed, integrations led, or margin improvements achieved. Confirm past fund performance, past LP references and instances of how management navigated downturns or competitive pressure.

Track record checks should include culture and labor relations: turnover rates, key-person dependencies, and the strength of operating teams. They affect execution risk and if promised growth is attainable.

Make due diligence a default step in any sponsorship evaluation to guarantee success over the long term. Develop processes that mix quantitative analysis with qualitative interviews. Use scenario modeling to test stress cases such as slower revenue growth, margin compression, or higher customer acquisition costs.

Include external considerations such as competitor moves, macroeconomic trends, and regulatory shifts that could alter the strategic imperative. There is a need for a defined roadmap from the sponsor on what they must do to hit targets, what resources they need, and when value will be realized.

Efficient information exchange between investors and sponsors is essential during the diligence process. Communicate expectations, flag issues early, and establish agreed-upon reporting that monitors the key strategic indicators.

This common perspective minimizes surprises and aligns upsell, product mix, and margin improvement incentives.

The Core Interrogation

Due diligence starts with a tight skeleton that directs questioning across finance, legal, operations, and risk. Develop a due diligence questionnaire that addresses financials, legal including FCPA and other cross-border rules, operational, cyber-security, and crisis recovery.

Apply technology to automate document collection, data verification, and discrepancy flagging, which reduces time and increases accuracy. Pinpoint critical risk areas such as tax exposure, legacy liabilities, network infrastructure weakness, and vendor concentration. Focus your questions on exposing those risks prior to investing.

1. Vision

Request sponsors to outline their long-term plan and objectives for the asset, including timelines and milestones. Ask for specific examples from past deals in which that vision created value, such as repositioning an asset, leasing from 60 to 90 percent, or adaptive reuse, which increased net operating income.

Match those examples to your ambition and risk appetite accordingly. Ask for specific commitments on responsible investing, including ESG targets, energy-efficiency upgrades, or community engagement, and how those actions affect returns.

2. Performance

Request detailed performance metrics from past deals: IRR, equity multiple, cash-on-cash returns, historical occupancy rates, and cash flow variance versus pro forma. Ask for fee schedules across deals, including acquisition fees, asset-management fees, and promote splits.

Request worked examples showing distributions under different performance scenarios. Verify historic projections against outcomes to judge forecasting skill. Compare those results to market benchmarks and third-party indices to assess relative performance.

3. Objectives

Clarify current offering objectives: expected hold period, target return band, preferred exit routes, and sensitivity to market shifts. Make sure every goal is quantifiable and supported by quantitative assumptions, like cap-rate compression or rent growth.

Inquire about how you will manage continued costs, including property taxes, cap-ex, and capital reserves, and who will manage it on a day-to-day basis. Ensure LP communications contain timely updates, budget variances, and event-driven disclosures.

4. Audience

Figure out the investor profile they’re targeting and verify the sponsor’s experience with that group. Request samples of communications and reporting cadence with comparable investors, for instance, quarterly KPI dashboards or annual audit reports.

Validate the sponsor’s ability to address varied investor inquiries and support governance requirements such as subscription agreements and KYC. Find out if previous investor relationships resulted in re-ups.

5. Operations

Scrutinize core operations: procurement, vendor contracts, maintenance schedules, and supply-chain resilience. Ask for evidence of workforce training, safety plans, and the tech systems used for oversight — property-management software, cybersecurity, etc.

Plan for business disruption and crisis recovery. Monitor property-management practices via on-site reports, third-party audits, or tenant surveys.

6. Ethics

Explore compliance programs, anti-corruption policies, and past legal issues. Ask for details of any pending lawsuits, fines or regulatory investigations. Go over the sponsor’s code of conduct, conflicts of interest, beneficial ownership, and compensation.

Verify tax compliance and request backup filings. Good due diligence exposes these problems early before they become expensive surprises.

Reading Between Lines

Reading between the lines in this case means noticing what isn’t said and using that to more accurately judge a sponsor’s real stance. In real estate and private deals, this aids in distinguishing between two comparable properties or sponsors by uncovering unseen expenses, operational voids or an underwhelming history. It’s about reading between the lines, discovering the hints in responses, statistics and actions that signal hidden danger or strength.

To effectively read between the lines, compare inconsistencies or gaps in DDQ responses and supporting documentation. Compare reported figures across documents: a rent roll that lists higher income than bank statements show or an operating expense schedule that conflicts with tax returns. Notice when supporting documents are absent, stale, or supplied in disparate formats at different levels of detail.

For example, a sponsor gives an aggregate expense number but cannot break out repairs, capital, and management fees. That gap suggests either sloppy record keeping or a cover-up of chronic maintenance problems.

Observe if you notice a pattern of half-answers, evasive explanations or hesitation to divulge key information. Non-specific answers such as ‘market rents are similar’ without comps or ‘we’re working through tenant issues’ without timelines are red flags and points to dig. Delays in delivering documents, especially if persistent, can be an early warning sign of the kind of items that will erode returns upon disclosure.

For example, if the sponsor resists sharing service contracts, ask directly for recent invoices. If they boast low turnover but won’t provide vacancy reports, consider the boast unsubstantiated.

Compare sponsor claims with independent data, customer reviews, and industry reports. Verify ownership, liens, or litigation by consulting public registries, court records, online reviews, and local market reports. Call a few tenants or scan social media for tenement hints. Compare asserted operating expense ratios against market norms. A far lower ratio may indicate deferred maintenance that will rear its head eventually.

Try using a due diligence checklist to identify places in need of deeper research or follow-up questions. Add financials, leases, service contracts, capital plans, insurance claims, legal history, licensing, and background checks on principals. Flag notes with pattern problems, such as serial bridge financing, serial CEO changes, or undisclosed related-party transactions, and refer them up.

A practical step is to score each area from 1 to 5 for transparency and risk, then prioritize follow-up on scores of 4 to 5.

Reading between lines is a skill. With experience, you discover which small incongruencies count. Use this talent on operating expense ratio, vacancy trends and frequency of capex to expose long-term cost drivers. It helps in negotiation. Understanding unspoken needs can lead to better terms or protective contract language.

The Assessment Process

The assessment process sets out how to find, test, and record risks tied to a sponsor or third party. It starts by naming the risk areas, then runs step-by-step checks, assigns who does what, uses standard tools, and keeps a clear record of results and follow-up.

1. Identify key risk areas and scope the review.

Begin by listing the areas to cover: firm background, ownership, regulatory standing, financial stability, investment strategy, risk management, ESG factors, IT and network security, crisis recovery plans, and third-party links.

Employ a risk matrix to rate likelihood and impact so scarce resources target higher risks. For example, rate a sponsor with overseas ownership higher when sanctions or foreign regulation are applicable.

1. Use a formal due diligence questionnaire and checklists.

Use a questionnaire focused on compliance issues — what laws and licenses apply to their work, client conflicts, policies around data-handling and disaster recovery, etc.

A full checklist can approach 100 items: governance, KYC, AML controls, cyber controls, subcontractors, insurance, and references. Customize questions by service type. Custodial sponsors require more detailed operational controls than marketing-only partners.

1. Assign roles and responsibilities within the diligence team.

For example, assign a lead reviewer to coordinate, a legal reviewer for contract and regulatory checks, an IT specialist for network and infrastructure review, an ESG analyst for social and governance issues, and an operations reviewer for business continuity and service delivery.

Specify timeframes and handoffs. For example, the IT expert conducts vulnerability scans and passes results to legal for contract remediation verbiage.

1. Apply enhanced due diligence where needed.

Trigger enhanced checks when red flags appear: complex ownership, offshore entities, prior violations, or critical access to systems.

These steps can be augmented by identity checks, site visits, deeper criminal and sanctions checks, and senior management interviews. Record the rationale for escalated actions to assist future decisions.

1. Use playbooks, templates, and repeatable workflows.

Have playbooks for different sponsor types and standardized report and questionnaire templates. Playbooks accelerate the process and minimize oversights.

Feature sample remediation language to include in contracts and a standard set of evidence requests.

1. Test technical and crisis readiness.

Inspect network diagrams, penetration-test outcomes, and backup and recovery time goals. Review crisis plans for continuity in the face of cyberattacks or natural disasters.

Check that backups are offsite and that recovery tests happen on a regular schedule.

1. Document findings, red flags, and recommendations.

Document all proofs, scores, notes and mitigation measures in a common repository. Include an executive summary and file.

Monitor open items, owners, deadlines and contract clauses needed. Good records underpin inspections and subsequent re-inspections.

Common Red Flags

They identify the potential common red flags that indicate where a sponsor or target business may require closer scrutiny. They indicate legal, financial, operational or market issues that can impact value and risk. Here’s a concentrated checklist of common red flags to watch for during due diligence, accompanied by concise, plain-English explanations of what they signify, where they manifest, and how to verify.

• Declining financial performance across several years includes falling revenue, shrinking margins, or fewer customers.
• High debt-to-equity ratio relative to industry norms.
• Sales concentrated in one or a few customers, with one or more accounting for over 20%.
• Accounts receivable problems include longer collection periods, large 90+ day buckets, or big write-offs.
• Pending litigation, ongoing regulatory investigations, or expired licenses.
• High employee turnover, repeated management changes, or weak governance.
• Excessive risk exposure includes large off-balance liabilities, contingent claims, or risky contracts.
• Unclear ownership, complex shareholder agreements, or related-party transactions.
• Unrealistic profit or growth projections that lack supporting data.
• Outdated technology or equipment needing immediate capital spend.
• Bad online reputation, several customer complaints or public regulatory notices.

Declining financial performance: Look at rolling three to five year trends for revenue, gross and net margins, and active customer counts. Make sure to verify if the downturns are cyclical, market based, or internal. Review monthly management reports and customer churn.

For example, a retail chain losing foot traffic and same-store sales for three years needs verification that store economics aren’t structurally broken.

High debt-to-equity ratio and accounts receivable issues: benchmark leverage to peers and review debt covenants. For receivables, look at average collection period, percentage aged 90 or more days, and concentration by customer.

For example, if 40 percent of receivables are with two clients and aging, post-close cash flow will be stressed.

Legal and compliance risks: identify unresolved suits, regulatory letters, or expired permits. Request litigation schedules, regulatory correspondence, and remediation plans.

Small administrative fines hide larger systemic compliance gaps that lead to penalties later.

Operational and governance warning signs include frequent CEO or CFO turnovers, weak board oversight, or no clear continuity plan. High staff churn usually translates to loss of institutional knowledge and execution risk.

Request org charts, employment contracts, and recent exit reasons.

Unrealistic projections, outdated tech, and reputation require back-tested assumptions, CAPEX plans, and digital audits. Question templates that display swift margin enhancement without efficiency forces.

Inefficient systems might require urgent expenditure, and scathing online reviews nip top-line post-acquisition.

Building True Partnerships

Building true partnerships begins with a shared framework for what success looks like and how each side will behave to achieve it. Sponsors need to be transparent about their objectives, strategies, and the assumptions in their models. Request written investment theses, gap analyses, and past projections versus actual.

Ask for samples of reporting formats and cadence so you understand how frequently you will receive updates and the level of detail they include. Transparent, regular reporting minimizes surprises and gives investors a chance to observe whether the sponsor’s decision-making track record aligns with its rhetoric.

Trust develops from consistent actions. Review the sponsor’s history of consistent decision-making, tenant selection, capital expenditures, and timing of exit. Check out case studies that detail the problems they faced, the decisions they made, and the result.

Request references from former investors and property managers and talk to them about responsiveness and follow-through. Look for patterns. Sponsors who regularly change plans without clear reasons are a higher risk than those who explain and document course corrections.

When you align interests, you avoid the most common conflicts. Define economics clearly: fees, promote structure, preferred returns, and how capital calls are handled. Provide sample waterfall calculations on a comparable-sized deal to understand how returns really divide under upside and downside circumstances.

Discuss nonfinancial goals too: sustainability targets, tenant mix, or community engagement. When both sides know what’s important, it’s easier to identify trade-offs and discover compromises that generate mutual value.

Working together requires genuine outlets and standards. Set up regular touch points: monthly operating updates, quarterly deep dives, and an annual strategy review. Agree on who has decision rights for routine items and what triggers investor consent for bigger moves.

Create a feedback loop where investors, property managers, and the sponsor exchange observations and suggest modifications. For instance, a property manager might highlight a leasing trend that needs repositioning. Direct escalation paths enable the sponsor to respond rapidly.

Flexibility and accountability keep partnerships strong. Build in mechanisms to handle unexpected events, such as defined reserve policies, reforecast triggers at set variance thresholds, and step-in rights if performance falls below agreed levels.

Put dispute-resolution steps and timelines on paper so small issues do not become relationship breakers. Embrace that partnerships are slow magic. Schedule regular relationship labor, including site visits, joint ship reviews, and informal check-ins to keep aligned.

Conclusion

The right due diligence slashes risk and creates confidence. Inquire with clear, targeted questions about track record, deal terms, team skills and conflict management. Review papers, verify figures and speak with former collaborators. Search for truthful responses, consistent behavior and early warning mechanisms. Look for reporting gaps, turnover and vague fees. A scorecard makes reviews fair and fast. Balance hard facts with gut checks from site visits and reference calls. Shoot for shared objectives, open books and open plans for exits. Fierce sponsor vetting produces not only steadier returns but less surprises. Initiate a bare-bones due diligence checklist today and tune it after every deal.

Frequently Asked Questions

What core financial documents should I request from a sponsor during due diligence?

Request audited financials for the last three years, tax returns, cash flow reports, and current budgets. These demonstrate stability, sources of revenue, and financial controls.

What governance and compliance information is essential to verify?

Ask for board composition, bylaws, conflicts of interest policies, AML/KYC procedures, and regulatory filings. It validates oversight and legal compliance.

How do I evaluate a sponsor’s track record and performance?

Prior project results, on-time delivery, references, and case studies. Seek consistent results, tangible KPIs, and customer testimonials.

Which operational risks should I probe with sponsors?

Inquire about their staffing stability, key-person dependency, vendor relationships, disaster recovery plans, and insurance coverage. These factors expose consistency and tenacity.

What red flags indicate a sponsor may not be trustworthy?

Be on the lookout for sloppy documentation, slippery responses, leadership churn, hidden liabilities or adverse audit opinions. These indicate higher risk.

How should I verify reputational and legal standing?

Conduct background checks, litigation history, media scans, and third-party reference checks. Independent validation minimizes surprises.

When is it appropriate to involve external advisors?

Engage legal, financial, or technical advisors for complicated structures, large deals, or ambiguous responses. Professionals minimize risk and maximize terms.