The Art of Building Wealth in the Lower Middle Market
Sequoya Borgman, Founder and CEO of Borgman Capital, joined host Chris J. Snook on The ATOMIQ Level podcast for an in-depth conversation on lower-middle-market investing, capital deployment, and the realities of professionalizing family-owned companies. Drawing on nearly two decades in public accounting M&A advisory and nearly ten years leading Borgman Capital, Sequoya offers a grounded perspective on why discipline, human alignment, and sustainable cash flow matter more than financial engineering.
The conversation explores how Borgman Capital utilizes deal-by-deal Special Purpose Vehicles (SPVs) to offer accredited investors and family offices flexible access to direct private equity investments. Sequoya breaks down the firm's approach to conservative leverage, tax optimization through Qualified Small Business Stock (QSBS), and the primary operational challenge in lower-middle-market acquisitions: navigating the critical transition from founder ownership to professional management.
Listen to the full conversation to learn how Borgman Capital sources, structures, and scales resilient cash-flowing businesses across the United States.
Key Takeaways
The Single-Deal SPV Structure Offers Flexibility Over Blind-Pool Funds
Traditional private equity relies heavily on commingled, blind-pool funds where limited partners commit capital without knowing which specific companies will be acquired. Borgman Capital operates an independent model, establishing a separate Special Purpose Vehicle (SPV) under Regulation D for each platform transaction. Through a platform managed via Asset Class called Pass the Hat, accredited investors, family offices, and former business owners maintain total discretion to review each opportunity and select the specific businesses they want to back, while providing an unlimited-life structure for the investment.
Managing Founder Transitions Is the Single Biggest Operational Risk
Acquiring a family-owned business requires converting a company built around a founder’s 24/7 personal involvement into a professionalized entity. Founders often embody a massive percentage of a company's operational capacity and institutional culture. Transitioning to a hired CEO or president frequently presents friction, as professional executives may lack the specific cultural fit or willingness to handle the round-the-clock demands of a smaller enterprise. Successful transitions often require restructuring management into broader functional teams rather than relying on a direct one-to-one executive replacement.
QSBS Structuring Yields High After-Tax Returns for LPs
For investments with enterprise values under $50 million (or $75 million under updated tax rules), deal structure dramatically impacts net returns. By executing asset purchases to achieve a step-up in basis and goodwill amortization, housing those assets inside a C-corporation blocker, and issuing pass-through LLC equity above it, investments held for five years qualify for Qualified Small Business Stock (QSBS) treatment. This structure completely eliminates federal capital gains tax upon exit while simplifying annual tax reporting for investors during the hold period.
Pragmatic AI Adoption Focuses on Workflow Efficiency Over Premature Cost-Cutting
While artificial intelligence offers significant personal productivity gains and streamlines specific administrative tasks like accounts receivable, accounts payable, or quoting, its current impact on physical, asset-heavy businesses remains incremental. In legacy manufacturing and distribution sectors, AI tools have not yet driven direct headcount reductions or gross margin expansions. Investors and operators should focus on fundamental cash flow generation and physical moats rather than over-investing in unproven technology solutions.
Questions Addressed in the Conversation
How does Borgman Capital evaluate lower middle market acquisition opportunities?
Borgman Capital focuses primarily on established companies with enterprise values under $50 million and annual cash flow or EBITDA between $2 million and $20 million. The firm targets stable, cash-flowing businesses in non-cyclical industries such as food processing, perishable goods distribution, pet products, and niche manufacturing. A key requirement is a long operating history that demonstrates physical moats and staying power across economic cycles.
How do buyers and sellers bridge valuation gaps when senior debt availability tightens?
When banks reduce senior leverage allowances due to interest rate environments or liquidity conditions, buyers must adjust capital stacks to preserve returns without over-leveraging the target company. Rather than taking on excessive senior debt, deal structures utilize seller financing notes, earnouts, contingent payments, or seller equity rollovers to bridge the gap between historical valuation expectations and current market debt availability.
What steps should a business owner take before placing a company on the market?
Business owners can maximize valuation and deal certainty by actively reducing buyer risk prior to sale. Key steps include conducting a sell-side Quality of Earnings (QofE) report through an independent accounting firm to establish clear add-backs, making necessary capital investments in ERP systems or facilities, and hiring or grooming a successor manager a year or two before the transaction to prove the business can operate smoothly without founder dependence.
From the Conversation
“At the end of the day, you’re buying cash flow. EBITDA does not tell the whole story. A business may have strong EBITDA but need significant capital expenditures, repairs and maintenance, or other annual reinvestment that absorbs much of the cash flow.”
-
This transcript has been edited for clarity and readability. Please refer to the original podcast recording for the complete conversation.
Chris J. Snook: Welcome to The ATOMIQ Level, the show where we decode the matters of wealth, one insightful conversation at a time, with business, tech and finance leaders on Substack—many of whom appear on the Market Stack Index, and some who are not there yet but are on their way. We look to discover them early so you can grow and protect your net worth and your net happiness. I’m Chris Snook, and today I welcome Sequoya Borgman, founder and CEO of Borgman Capital. Welcome to the show.
Sequoya Borgman: Thanks for having me on the show. I’m excited to be here.
Chris: As our audience knows, we’re going to get right into the backstory and operating system that shaped your worldview, what got you here and what you’re working on. Then we’ll look for tactical and practical insights our listeners and your new fans can apply to their businesses, lives and thinking to be better prepared for the world we’re rapidly moving into. Tell us your backstory. First, you have one of the coolest names—and spellings of that name—that I’ve seen. Where did it come from? What is your heritage?
Sequoya: The short story is that I had hippie parents. I’m a Northern California guy, like you. I was born in Mendocino County back in the ’70s. There were a lot of flower children back then, and my parents thought it would be a cool name. They weren’t great at spelling either, so it has a slightly different spelling. It is unique. It gets butchered all the time, but it stands out for sure.
Chris: I was curious whether it came from that or from some kind of First Nations heritage. We go to the sequoias quite often. Every summer, we take a trip with the cousins to the ranch, and it’s all in the sequoias and the Trail of 100 Giants. So I’m happy to be talking to one of the 100 Giants today. Talk to us about that background. You were born and raised in Northern California, and now you’re in Milwaukee.
Sequoya: I was born in Northern California and lived in the Bay Area as a kid, but I moved to North Carolina for high school and college. I lived on both coasts and in a few other states after college. I moved around and ended up in Milwaukee almost 20 years ago, so I’ve been in the Midwest quite a while.
Chris: What was the path into what you do today? What shaped your worldview and career arc? Did you go to school for finance or capital, or was it a more organic path?
Sequoya: Born to hippie parents, I’m kind of the black sheep of the family. They certainly didn’t want somebody going into private equity. I went to college for accounting, earned my master’s in accounting and started in public accounting. I worked for Arthur Andersen. The firm is no longer around, but it was the largest firm at the time. It was a great experience. I worked on lots of transactions and spent about 18 years at large public accounting firms, primarily on M&A transactions, with private equity firms as my clients. After a couple of decades, I was a partner and had worked on hundreds and hundreds of transactions. I decided I wanted to do something a little more entrepreneurial. Some of my private equity friends and clients were having a lot more fun. When I launched the firm, it was the heyday of private equity and a lot of deals were getting done. I decided to sit on the other side of the table, left a nice, secure career and launched a firm. It has been about a decade, and I haven’t looked back. I wish I had done it earlier in my career, but it has been a lot of fun.
Chris: You still have your hair, but it sounds like we’re around the same age. I’m guessing you graduated in the mid- to late ’90s?
Sequoya: I got my master’s in 1998.
Chris: So we’re from the same era. You were with Andersen before it collapsed after Enron. Did you move to one of the other Big Four firms for the next 15 years?
Sequoya: I worked for a couple of the other Big Four firms. I spent about five years at KPMG, then Deloitte, and finished my career with RSM here in the Midwest. It was all good experience. Each firm focused on differently sized private equity clients. RSM was where I was introduced to the size of deals we work on now—lower-middle-market or middle-market firms. I’d recommend that everyone start their career with a large firm where they receive good training and see many different things. But I’m excited to be doing what we’re doing now.
Launching Borgman Capital
Chris: Was the entrepreneurial itch there all along? With hippie parents, maybe there was a freedom angle. Or did 18 years near the top of the corporate game—as a partner exposed to so much deal flow—make you realize you wanted to be on the other side of the table?
Sequoya: I think I was always entrepreneurial and ambitious. I always wanted more in my career. I was promoted and made partner very early, which had been my goal when I entered public accounting. But when you’re a partner at a big international firm, you have a thousand other partners. That’s different from being the owner of a boutique firm or the size of firm we’re running. Being the decision-maker is much more enjoyable.
Chris: You launched Borgman Capital around 2017. What gap in the market spurred you to leave the comfort of nearly 20 years in public accounting?
Sequoya: We launched in 2017. At the time, there was one other private equity firm in Milwaukee, and it was a little upmarket from us. At the lower end of the market, there really wasn’t anybody doing deals in this part of the Midwest. It was primarily firms from Chicago, New York or the West Coast buying many of the companies. There was a gap. A lot of entrepreneurs and business owners want to sell to somebody they know and trust, who shares their values, and they prefer somebody local. That helped us from the beginning. We were fortunate to find good business owners who wanted to sell to somebody like us.
Chris: How broad is the market where you look for deals? Are you mostly in the Midwest or within two or three states?
Sequoya: We’ll go wherever the deal is. We’ve bought companies all over the country—as far away as Hawaii, and on the East Coast, West Coast and throughout the Midwest. About half of our deals are in the Midwest. We now have offices across the country, based in secondary cities where relationships still matter, everybody knows each other and you can be introduced to good entrepreneurs and find good investment opportunities. We’re headquartered in Milwaukee, but we have people on the East Coast and West Coast. We look for opportunities throughout the United States and will go wherever the opportunity arises.
The Lower Middle Market
Chris: What do you consider the lower middle market?
Sequoya: The lower middle market is generally under $250 million in enterprise value. Most of the deals we focus on are much smaller—primarily under $50 million in enterprise value. Most entrepreneurs have the majority of their net worth tied up in their businesses and are very concentrated, so we help them get liquidity. From a revenue standpoint, most of our businesses are under $200 million, but we’re more focused on cash flow or EBITDA. We typically look at businesses with $2 million to $3 million of EBITDA on the low end and up to $20 million of annual cash flow.
Chris: How has sector appetite evolved since 2017? Is the bread and butter largely the same, or are different opportunities more interesting now?
Sequoya: It has become more competitive and harder to get deals done over the last couple of years. In the late 2010s, many deals were getting done. With plumbing and HVAC roll-ups, people were paying very high multiples. To some extent, you had to get in early on those roll-up opportunities. Multiples have come down somewhat, especially exit multiples, and we’ve seen a meaningful slowdown over the last year or two. Good, cash-flowing family businesses still command solid multiples. Over the last two years, multiples have stayed relatively flat, but there is much more structure. It is more of a buyer’s market than it was a few years ago, with seller notes, earnouts and contingent payments tied to transactions.
Chris: Is that simply a function of the interest-rate environment, or is more sophisticated rigor being applied to the deals? Are the interest-rate increases forcing a more creative financing stack?
Sequoya: Interest rates have something to do with it, but it isn’t like real estate, where there is a direct correlation through capitalization rates. For us, it is more about liquidity—how much leverage a bank will put on a transaction. If a bank would put four or five turns of leverage on a transaction three years ago but now will put on two or three, getting the same return requires lowering the price by one or two turns. Sellers’ expectations are still where they were a few years ago, so buyers try to bridge the gap with seller financing or an earnout. If the seller still wants to receive what they could have received two years ago but the bank will not finance as much, the seller effectively provides that additional part of the structure.
Financial Services, Capital Deployment and Deal Structure
Chris: A lot of private equity activity in financial services occurred in 2022 and 2023, with RIAs being rolled up. The industry remains fragmented. Many firms have less than $1 billion in AUM, putting them in the lower end of your target range. Those roll-ups were paying 18 to 22 times EBITDA in 2022 and 2023. Deal flow now seems lower, and perhaps owners are not ready to sell. Have you done much in financial services, including accounting firms, and what trends do you see in price and value?
Sequoya: We haven’t pursued that sector. It is popular, and a lot of private equity firms are doing roll-ups in the space. Insurance brokerages, RIAs and accounting firms have attractive recurring revenue and cash flow, and buyers are essentially paying a discounted value for those future cash flows. Rising interest rates affect what buyers can pay. I think lower deal flow is related to owners not getting exactly what they want unless they have an exceptional business. There is always an appetite for those, but middle-tier businesses are probably receiving a few turns less than they could have received when interest rates were lower. I previously sat on the board of a public bank where we did some of that, so I’m familiar with the sector. We’ve looked at deals there, but I believe we can generate higher returns for investors in other segments.
Chris: How much capital are you deploying now, and where did you start? Is there a traditional fund, or an ongoing vehicle with redemptions?
Sequoya: We’ve deployed about $500 million in capital. Our model is different. We establish a separate special purpose vehicle with a Regulation D filing for each company we buy. Each company or platform is a separate equity investment. If we buy a company and then make three or four add-on acquisitions, those investors remain within that platform. It is similar to a fund but has an unlimited life and is more flexible. Investors do not have to invest in 10 companies across a fund; they can choose the companies they want. Many of our investors are high-net-worth individuals, ultra-high-net-worth individuals and family offices whose wealth was built by owning businesses. They like investing in similar types of companies, and we give them the flexibility to do that.
People, Leadership Transitions and AI
Chris: What lessons have you learned over the last decade? For people looking to sell a company or become an LP, what frameworks could serve as shortcuts or reduce pain as they move beyond a traditional 60/40 portfolio and consider a larger allocation to alternatives?
Sequoya: There have been many lessons, and some of the most valuable were painful. The issues in the businesses we invest in are usually people issues: hiring the wrong person or retaining the wrong person. Most of the businesses we buy are family businesses. We acquire them, bring in a new president and professionalize the business. That transition is hard because founders represent a significant portion of the value. Moving from a founder to a professional CEO or president is difficult. Sometimes the new leader has the best intentions but does not fit the culture or cannot manage the business effectively. Most entrepreneurs work on their business 24 hours a day, seven days a week. Professional presidents and CEOs may be accustomed to running a large division in a larger company, where they take vacations and are not on call around the clock when employees have issues. That is the biggest challenge. Sometimes we have to hire three or four people to replace the CEO or founder. Our biggest mistakes have generally involved hiring.
Chris: There is a human element to your approach. Sellers want to work with a firm they feel they know, and they do not want to be treated as just another fee. As you acquire businesses, transition teams and professionalize operations, how far have you gone with AI? Can it help solve owner dependence by codifying 30 years of knowledge for a new manager? Are you doing any agentic work, and where are you on the learning and deployment curves?
Sequoya: We’ve spent a lot of time and effort considering how AI can simplify processes and improve businesses. At the end of the day, we’re trying to improve enterprise value and returns, and we support implementing AI where it can do that. Despite the time, effort and money we’ve spent, the actual returns and savings—from a people or revenue standpoint—have been limited. We’re still early in AI adoption. It saves me a great deal of time personally, and I use it often. But has it generated revenue, saved costs, improved gross margins or reduced headcount? That has been very limited. I think it is coming, but we are still at the front end. We are not buying software companies with large engineering teams, where AI may have a bigger impact. Most of our companies are manufacturers or distributors. AI can help with accounts receivable, accounts payable, quoting and parts of the sales process, but I have seen very little actual cost-cutting or replacement of people so far.
Chris: It may be better to be early and patient—to recognize that the initial ROI may not be high but that the work is still necessary. It feels like a “slowly, then suddenly” shock. What have you learned about the present impact and justification for AI in non-technical businesses?
Sequoya: I think it is making people’s lives easier and saving time. I just don’t see that time being redeployed into additional revenue-generating activities yet.
Chris: Do you see resistance across the portfolio—fear, resistance or apathy—when someone says, “We’re going to test some AI tools”? What is the broad response?
Sequoya: The response has been very positive. We’re invested in a data analytics and AI consulting business, and they are all over it. At the same time, every one of our companies is inundated with small startup AI consulting businesses that charge high fees or success fees and, to date, have shown little in the way of actual results. Companies are probably getting overwhelmed. If we saw successful cases or good examples of people creating value, we would be very supportive of implementing those ideas.
Chris: That validates what I would assume. Portfolio companies are seeing so many demos and cold calls that the fatigue and noise can offset immediate productivity gains.
Sequoya: Right. Everybody is an AI expert these days. Look at what most of them were doing a year ago. I do agree it will create a lot of value at some point; we’re simply early in the process.
Buying and Financing a Business
Chris: If someone wanted to buy an established, well-regarded business generating $2.5 million of EBITDA—with a good workforce, quality reputation and the attributes that make family-run businesses special—how should that person approach the opportunity? How should they analyze it, and what should be on the diligence checklist?
Sequoya: First, give me a call because I want to invest in that business. Seriously, if you’re looking at a business with $2 million or $3 million of EBITDA, anything smaller is usually bought by an individual using SBA financing. Government-backed financing is generally the best path for an individual buying a business. If the purchase price is $5 million or less, I would use the SBA route. That is where you can generate the most net worth and obtain the best financing.
Sequoya: A business with $2.5 million of EBITDA may sell for four to seven times EBITDA, depending on the segment—roughly $10 million to $17.5 million. In our case, we might use 2.5 to three turns of senior leverage from a regional bank that likes those businesses. Larger banks often do not want to work with smaller companies. We might add another turn of seller financing or mezzanine financing. Many mezzanine funds provide subordinated debt—higher-interest debt that sits behind the senior bank debt. The remainder comes from equity provided by our investor group, and we invest personally in every deal.
Chris: What debt-service coverage ratios are you modeling? If you factor in senior debt, mezzanine debt and perhaps a seller carryback—without using SBA financing—how much equity would you need in a $15 million acquisition?
Sequoya: We’re conservative because putting too much leverage on these businesses creates risk. More leverage can increase the IRR, so there is a balance. For a business that size, we would not want to put more than three, three and a half, or at most four turns of leverage on it. The rest would be equity—perhaps $5 million to $7.5 million of equity, with the balance in some form of debt.
Chris: So perhaps 50% to 70% loan-to-value, depending on the deal?
Sequoya: If you were only paying four times EBITDA, you might put only two turns of debt on the business and use a much higher percentage of equity.
Diligence and Preparing a Business for Sale
Chris: How do you recast EBITDA in a closely held, family-run business where personal expenses, a boat or other items run through the company? From your perspective as an accountant and forensic deal professional, what should buyers look for on the balance sheet, cash-flow statement and income statement to build a better package for the bank?
Sequoya: At the end of the day, you’re buying cash flow. EBITDA does not tell the whole story. A business may have strong EBITDA but need significant capital expenditures, repairs and maintenance, or other annual reinvestment that absorbs much of the cash flow. You pay a lower multiple for those businesses.
Sequoya: With personal expenses, you need to make sure the seller is not doing anything improper that you will have to address after closing. We use a third-party accounting firm to perform a quality of earnings report on every deal and recommend that sellers do the same. It makes negotiations cleaner and improves the likelihood of a smooth closing. Firms can perform buy-side or sell-side quality of earnings reports at a reasonable cost and identify appropriate add-backs. Sophisticated banks often require that work anyway, and it is simply good practice.
Sequoya: If an owner has employed four family members and run healthcare, a boat and other expenses through the business, cash flow may increase after those costs stop. But you may also need to spend money on systems, professionalizing the business or a new ERP system. Someone who has run a business for 40 years may perform many roles that require two or three higher-paid people to replace. I would be more concerned about those replacement costs than travel, cell phones and similar personal expenses.
Chris: Those expenses can be easier to back out because they do not involve an underpaid person whose replacement cost may be uncertain. A key individual may be paid 30% below market, and that has to be considered.
Sequoya: Make sure you work with good advisors. You need a strong deal attorney and an accountant who understands transactions and quality of earnings. Review environmental issues and customers. We conduct a voice-of-customer report on every deal to learn what customers think and whether they will continue buying after closing. Conduct full diligence. You’re spending a lot of money on a business, so do not skimp on the advisors providing guidance.
Chris: What metrics do you prioritize for an investor focused on cash-on-cash return and uncorrelated asset accumulation—something with current cash flow and a potential exit premium from growth and efficiency? Are they the obvious metrics: IRR, cash-on-cash return, hold period and reinvestment needs?
Sequoya: There is a lot a seller can do to increase the value of a business. The most important thing is reducing risk for the buyer. If the buyer will need to hire a president, why not hire that person before the sale and let them learn and run the business for a year or two? That is much less risky for the buyer, who will pay more as a result. If you need systems, a new ERP system or a facility expansion, make those investments yourself before selling.
Sequoya: We also support sellers rolling over a meaningful portion of their equity if they want to stay involved during our investment period. They can make more money at the end as we grow enterprise value, and it can defer taxes on part of the transaction. If we finance a deal with half equity and half leverage, for example, a seller could receive 80% of the proceeds at closing and retain 40% ownership because of the equity benefit created by leverage.
SBA Financing and the LP Alternative
Chris: I once heard that the SBA program is designed as much for the seller as for the buyer. If a business can be prequalified for $5 million of SBA financing and the seller is open to a carryback, that can help the seller. It may also cause an inexperienced buyer to pay $7 million for a business worth $6 million simply because $5 million of SBA financing is available.
Sequoya: Most of the loan is government-guaranteed, so banks will finance it. The buyer generally needs to contribute only 5% or 10% of the equity. On a $5 million deal, that is $250,000 to $500,000. It does not all have to be the buyer’s money; they can bring in investors to help fill the gap.
Chris: Many people want the cash flow and output of owning a business without the infrastructure, experience or operational responsibility. With $250,000 to $500,000, I could buy myself that responsibility and perhaps use SBA leverage. Or I could become an LP in one of your syndicated deals and access shared services, systems, banking relationships and infrastructure built for operating small and medium-sized businesses. With SBA financing, the buyer usually provides a personal guarantee.
Sequoya: That is the biggest factor. You’re putting your family’s livelihood and your house on the line.
Chris: The government may back 75% of a $5 million loan, but the bank will still require a personal guarantee and examine your FICO score. That does not mean it is a bad idea; it means there are constraints that become apparent when you try to close. If what I really want is a 7% to 10% annual cash-on-cash return and a potential high-teens or low-20s IRR after five years, I may not need to buy the drill. I may only want the hole in the wall.
Sequoya: People often do not understand how much work is involved. We have an entire team managing these businesses, and it is still a lot of work.
Growth, Control and Hold Periods
Chris: I saw that Borgman Capital appeared to be hiring. Are you growing? You now have multiple offices and markets.
Sequoya: We’re always looking for good people who want to do what we do: source good investments around the country. We look for people with strong networks who can source businesses and talk with business owners. Someone from South Florida joined us recently, and another person from Indianapolis joined us late last year in those roles. We’re always looking for deal-origination and sourcing professionals.
Chris: Are you interested only in deals where you can own a controlling stake, rather than syndicated deals where someone else leads? What is the largest deal you would do?
Sequoya: We only do control deals. We are the GP, and nearly 500 LPs have invested with us. We’re responsible for their hard-earned money, so we cannot do anything where we are not in a control position. We are flexible about the rest of the structure. As long as we acquire control and control the board, we will pursue a good investment opportunity.
Chris: What is the upper bound—$100 million or $200 million in enterprise value?
Sequoya: The larger the deal, the more competitive it becomes. Most large deals are sold through major investment banks in blind auction processes. The winner can face the winner’s curse because it paid the highest amount. We sold a company last December and received 40 offers. The winning firm paid the highest price.
Chris: That becomes your off-ramp. You buy below that level, grow the business and potentially sell it into an auction where a larger buyer may need it for a broader strategy, such as a roll-up or public-company platform. Is your average hold period five to seven years?
Sequoya: We can hold long term, but our incentive—and management’s incentive—is to generate the highest return in the shortest prudent period for investors. Deals under $50 million—and now, with tax changes, under $75 million—can be structured as qualified small business stock transactions. If we hold for five years, there can be no capital gains tax, so there is a strong incentive to hold for five years. But if we receive an offer we cannot refuse after three years, we may sell. If it is a strong cash-flowing business, we could hold it for 10 or 20 years.
Qualified Small Business Stock (QSBS) and Investment Structure
Chris: Are you usually buying a going concern or using an asset purchase agreement and restructuring the company to qualify for incentives? A smaller company may be an S corporation, LLC or general partnership, and your structure must account for the SPV dynamics and tax benefits.
Sequoya: We primarily use asset purchases or another structured transaction to obtain a step-up in basis and the related goodwill amortization. We then establish a C-corp blocker to hold the assets and take advantage of QSBS. Above that, we establish a pass-through LLC in which investors hold their interests. They receive a K-1, but there is generally no activity because of the C-corp blocker. There are no state tax filings and no income flows through to investors unless we pay distributions or sell the business. Those are generally the only taxable events.
Chris: That structure became more attractive after the corporate tax rate fell to 21% from 35% in 2018. Before then, investors tended to use flow-through entities because paying two levels of tax did not make sense. With a lower corporate rate and QSBS treatment after a five-year hold, the after-tax return can be difficult to match. Does the fund appear on the C-corp capitalization table as a single shareholder, with K-1s that are effectively zero until exit?
Sequoya: We may have 100 LPs investing in a company. They each receive an annual K-1, but it contains zeros until we pay distributions, sell the company or complete a redemption. Those are taxable events, but the structure is otherwise simple from a tax standpoint.
Chris: Do your LPs still prefer a traditional Delaware structure, or are you using Wyoming, Texas or other jurisdictions?
Sequoya: Delaware is still our primary domicile for both the C corporations and LLCs.
Chris: Recent discussions involving Elon Musk and others have not changed your approach?
Sequoya: No. Delaware works for what we’re doing.
Economic Uncertainty and Durable Businesses
Chris: What headwinds and tailwinds are you considering or war-gaming?
Sequoya: There is a lot of noise and uncertainty in the economy. Despite what is happening in public markets—which is pretty astounding—it is hurting lower-middle-market deals. Fewer buyers want to acquire a company without knowing what cash flow will look like next year because they do not know where tariffs, interest rates or oil prices will be. I would like to see more certainty and stability. We have dealt with this since COVID, including supply-chain disruptions, labor issues and other challenges. For five or six years, it has been harder to forecast future cash flow.
Chris: In a world where AI becomes embedded in workflows, we may eventually discuss it as little as we discuss electricity. If that is where we are headed in two or three years, what are the durable moats? Trusted and reliable distribution is one because goods still have to move, whether they are atoms or bits. Are you focused on last-mile distribution or particular industries?
Sequoya: There are many moats. If you need a plumber, AI is not going to be your plumber. The same is true for electricians and many service industries, which is why people invest in those sectors. About half of our investments have been in food or adjacent industries. People are still going to eat, and perishable food still needs to be distributed. AI cannot replace everything. I’m curious to see how Tesla’s robots affect manufacturing. They may affect labor, but people will still want to buy products.
Chris: I researched humanoid robots about six months ago. Even if we assume a billion humanoids with highly capable hands, we do not currently have enough energy or chips to support everything already planned, much less that scale of robotics. Even if those constraints were solved, higher-priority uses—including SpaceX, Mars-related projects or military applications—could absorb early production. Based on those commitments and the physics, it may be 10 to 15 years before robots threaten local plumbing jobs. We may be in our 70s by then.
Sequoya: I’ll be long retired by then. I think we’ll have many social issues to address before that happens, but we’ll see what the future holds.
Chris: What kinds of food and perishable-distribution businesses interest you?
Sequoya: We have a frozen-food company in Alabama that sells branded food through retailers across the South and up the East Coast. We’re in Wisconsin, so we own two cheese companies. You have to own a cheese company if you’re in Wisconsin. Those are great consumer businesses, and I would buy more if I could find them. We also have a pet-food company. People love their pets and spend a lot of money on them. That creates recurring revenue. Spending on pets may have been higher during COVID, when people were home all day, and it may have declined somewhat, but people are not going to starve their dogs.
Chris: Absolutely. We used to have dogs, and now we have kids and a cat. I did not think I was a cat person, but when that cat wants food, it will keep asking until you feed it. You may not want to buy the food, but it is getting bought and put in the bowl to preserve your sanity.
Sequoya: Those are the kinds of businesses I love: businesses with recurring revenue. I’m a numbers person and a former—or inactive—CPA, so I focus on cash flow. That is what pays investors, pays the bank and generates the best return. Companies with steady cash flow in good, less-cyclical markets are attractive investment opportunities. Most of the businesses have been around for 50, 60 or 70 years, so they have demonstrated staying power.
Chris: That stickiness is not only blind loyalty. It is also habit and the cost or risk of switching. With pet food, for example, customers may stay because changing products could upset the animal or waste money. If it works, they leave it alone. Simple, boring businesses can have excellent cash flow. Porta-potties are another example. They are required at public events and races, and someone owns and rents them. People jokingly say those businesses “smell like money.” Some of the strongest margins and cash flow exist in businesses people do not want to do or think about. Every time I see a highway full of traffic cones, I wonder who owns them and why I am working so hard when somebody is getting paid each month for those cones to sit there.
Sequoya: Let’s do it.
How Investors Participate
Chris: How does the LP process work? What are the minimums? If I have $500,000 but want to spread it across several deals, do I commit money in advance and earn a yield while it waits, or do you call when a deal becomes available and let me choose whether to invest?
Sequoya: We have a platform managed by a fund administrator called Asset Class. The platform is called Pass the Hat. Accredited investors can establish an account and see the deals. For smaller deals, our minimum is generally about $50,000, and it increases depending on the size of the transaction. We cannot have a thousand investors in one deal.
Sequoya: These are alternative, illiquid, longer-term investments with somewhat higher risk than, for example, a multifamily property producing a steady 7% cash-on-cash return. I recommend spreading an allocation across several investments. We are oversubscribed on every deal, so an investor requesting $100,000 may receive an allocation of $70,000 or $50,000. Investors can review every transaction and pass if a deal is not of interest. A third party verifies accredited-investor status. I also like speaking with LPs directly: if you do not understand the market or what you are investing in, it is probably not for you. Talk with your wealth manager. If direct investment in private businesses is of interest, that is exactly what we do. But alternatives also include angel investing, venture capital, growth equity and many forms of real estate. We are value investors in the lower middle market.
Chris: The typical LP seems to be someone who built wealth by running a business, then sold it or created enough cash flow to invest. They understand risk and reward and want an experienced administrator to put money into businesses they believe in. Is that accurate, and how much institutional capital is involved?
Sequoya: We have some institutional investors, but most are family offices or high-net-worth individuals. Much of the country’s net worth has been built by owning an asset, usually a cash-flowing business. Most family offices I speak with were formed after a family sold a successful business built over two, three or four generations. That is what we buy—similar companies, generally at a smaller size. Some sellers form family offices or multifamily offices after a significant liquidity event. They then invest in other companies to diversify rather than keeping 100% of their wealth tied to one business. They may invest across five or 10 businesses and reduce concentration risk while retaining upside. We do not buy a business unless we believe it can generate a minimum projected IRR of 20% to 30%, given the leverage and risk. Those are the returns investors in our space expect.
Tax Benefits, Real Estate and Opportunity Zones
Chris: Because your strategy is to professionalize companies and seek the strongest return in the shortest prudent period, did qualified opportunity zone businesses play much of a role in 2019 and 2020? Could they become part of the mix when new zone guidance arrives in 2027?
Sequoya: We consider them, but we have not found anything where the tax benefit made the investment worthwhile. We do not invest simply for a tax benefit. Tax advantages are ancillary. Even in real estate, I would not invest solely because a property is in a qualified opportunity zone if it is otherwise a poor investment. First, you want a good return; then you look for ways to defer or avoid taxes. We do not let the tax strategy drive the investment.
Sequoya: We have a separate real estate investment group that primarily completes sale-leaseback transactions involving industrial buildings. Many business owners we speak with also own their buildings, so we began setting those up separately for investors. We also offer related real estate investments alongside some of our deals. They can provide attractive cash flow and returns, but our primary focus remains buying companies. Some companies may be located in enterprise zones, but most are not.
Policy and Geographic Risk
Chris: Are there states you avoid because of policy? This is not about political preference; it is about the practical effects of minimum-wage rules, taxes and regulatory uncertainty on small-business operators. For example, California. Do you avoid states where that uncertainty exists, even when you like the business?
Sequoya: Without getting political, yes. We avoid states where policy could adversely affect the investment. We have not bought anything in California, despite the fact that I am from there. We looked at a few businesses. At one company, we asked the management team for ideas to grow the business and generate more cash flow. The first of their 10 ideas was to move out of California. That is the reality. It is hard to invest significant money where the business environment is negative.
Chris: Especially because many of the businesses you buy cannot easily relocate. It is frustrating when firms such as Borgman Capital can facilitate a transfer of wealth that benefits LPs, sellers, employees and local communities, yet must avoid certain markets. On the other hand, could valuations fall far enough that the risk becomes acceptable?
Sequoya: You account for the additional risk by paying less for the business. Higher taxes also reduce cash flow. That is what you are buying: a stream of cash flows valued through a discounted cash flow model. In high-tax states, where more cash flow goes to the state, you pay less for the business.
Work, Family and Meaning
Chris: What have we not discussed that you want to make sure we cover?
Sequoya: This is what I do, so I could talk about it all day. I’ll geek out with you about investing in lower-middle-market companies.
Chris: I have a couple of deals I want you to review with me off the recording. I think they may fit your sweet spot. It is good to know I have someone I can bring them to.
Sequoya: Please do. I also invest personally, so I’m always interested in others doing good work.
Chris: You do not really have hobbies. You are as obsessed as I am. You have this entire machine, and in your free time you cherry-pick investments.
Sequoya: It is a disease. It is good to enjoy what you do.
Chris: I agree. It is a game with moving pieces, changing players, environments and dynamics. It is good to meet someone who enjoys the work 10 years into this firm and roughly 30 years into a career. Do you have children?
Sequoya: I have teenage boy-girl twins in high school.
Chris: I have toddler boy-girl twins and an older teenager. What do you think about as it relates to their future? Most parents are optimists, but they also have concerns. Has your work changed how you think about preparing them for the future and what work may look like?
Sequoya: You never know what they will be good at, but I would love for them to do something similar. I feel like I have figured out how capitalism works. I was raised by a single mother who did not have that knowledge and gave me little career direction, so I largely found this path by chance. Now that I understand which strings to pull and how capitalism works, I hope they take those lessons and build on what I have started. They do not necessarily need to work with me, but I hope they consider private equity, private real estate, investment banking or something related. Of course, they are young and may choose something completely different.
Chris: I think about this differently the second time around. With my oldest, I mainly wanted him to be happy and to love what he does. I love my work—not because it is easy or free of headaches, but because, as my wife says, you choose your hard. I enjoy the good days, bad days and everything in between. We want our children to love what they do, and we do not want them to start where we started. We want to build a foundation they can stand on while avoiding forcing them into a role that makes them miserable.
Chris: I loved playing football, but when my son was not interested, I was relieved. I had an artificial hip by 47, so perhaps it is better that he will not spend years colliding with 300-pound men. I hope our children have the chance to be more human. After 15 years of algorithms, technology and convenience, AI may push us back toward human connection. We may over-automate one side of life while creating a strong desire for analog, person-to-person experiences on the other. Emotional intelligence is what I hope to model as I get older.
Sequoya: That is important. Work ethic matters too. Children raised in a more affluent situation may find it difficult to understand truly hard work, and that is not something you can easily teach. That is what I worry about.
Chris: That is natural—the blessing and the curse. I would still rather have it that way. What got us here will not be what gets them wherever they are going; otherwise, we did not do our jobs. If we do our jobs, we raise the bar and provide a better starting point without placing them at the finish line. They need to define their own finish line. After 25 years, I have learned that the joy is in the doing. It is a race to nowhere, so you had better enjoy the race and the work. You need to find something that gives you meaning. Otherwise, you may buy everything you thought would create that feeling and discover that it did not.
Sequoya: That is my biggest concern with AI. People still need meaning, and many people derive meaning from work. If AI, automation and robotics replace that, it could create a difficult situation.
Chris: I think that is the current narrative being pushed down people’s throats, and I fundamentally do not worry about it because it has never been our history.
Sequoya: It will have to be solved.
Chris: Human beings are remarkably resilient. We began in caves, moved west without guarantees and endured enormous sacrifice. Over the last 50 years, many of us have not had to focus on basic survival, and over the last 30 years we have financialized much of life and lost touch with value and meaning. Now we may be rediscovering that meaning matters. We will invent a hundred new things to do.
Chris: The near-term risk is that productive people gain extraordinary leverage and become overwhelmed. Something that once required $100,000 and 24 months may become an MVP in 24 hours, which tempts you to launch nine more projects. Then you realize you should take a walk, rest or eat. There will be no shortage of work.
Sequoya: That is true. We will invent new things to do.
Chris: Our children need to see us finding meaning, being creative and remaining willing to learn. That shows them a future they do not have to fully understand today. The biggest risk I see is nihilism—the belief that none of it matters. It is concerning to see both older and younger people feeling that way. More examples of people enjoying the game show that another option exists.
Sequoya: We’re having a lot of fun, so we’ll keep doing deals.
Chris: Keep doing deals. Deal-making is fun, and humans have always traded, from the time we could first communicate. It was great having you. I look forward to staying in touch. We’ll include your information in the show notes. Sequoya is new to Substack, so follow him and give him a reason to start sharing more about deal mechanics. If you have capital to allocate, you know where to find him. Thanks for joining us.
Sequoya: I enjoyed it. Thanks for having me.
