How Independent Sponsors Buy Companies and Earn Seller Trust
On Built to Sell Radio, host John Warrillow speaks with Sequoya Borgman, Founder and CEO of Borgman Capital, about how independent sponsors acquire established lower middle market businesses. Sequoya explains the deal-by-deal model, walks through a hypothetical acquisition, and discusses what leverage, seller financing, rollover equity, and management incentives mean in practice.
For business owners considering a sale, the conversation offers a useful view from the other side of the table. The strongest lesson is that a good transaction depends on more than price. Buyers need realistic underwriting and the ability to close. Sellers need an honest transition plan. Both sides need alignment around the company, its employees, and the work required after closing.
Watch the episode for a practical explanation of how independent sponsors evaluate, finance, and transition privately held businesses.
Key Takeaways
Independent sponsors raise capital around each company, not a fixed fund
Unlike a traditional private equity fund, an independent sponsor does not begin with one committed pool of capital and a fixed fund life. Borgman Capital lines up the debt and equity for each acquisition separately. That structure gives investors a choice about which companies they back and allows the firm to pursue opportunities without forcing every investment into the same timeline. It also creates direct accountability. Each company has its own capital structure, lender relationship, operating plan, and investment case.
Real value creation matters more than financial engineering
A sound investment case cannot depend on buying at one multiple and selling at a higher one. Durable returns require operational progress, including stronger margins, revenue and EBITDA growth, better systems and processes, and a capable management team. Leverage can increase equity returns as debt is repaid, but it also magnifies stress when performance declines. Base, upside, and downside models help test an opportunity, yet no five- or 10-year projection unfolds exactly as expected. The practical lesson is to treat financial models as decision tools, not predictions, and ground the investment thesis in work the business can control.
Seller honesty is a risk-management tool
The most useful answer to why an owner wants to sell is the honest one, not the most polished one. Understanding the seller’s actual goals, energy level, and plans after closing allows both sides to design a transition around real circumstances. Rollover equity can create financial alignment, but it cannot guarantee continued motivation after a major liquidity event. The deeper question is whether the former owner remains committed to the company, employees, and legacy, especially during the first year or two when leadership transition and leverage create the greatest risk.
Founders should be respected during a transition, not micromanaged
Many founders became entrepreneurs because they wanted the freedom to make decisions independently. Imposing a new operating plan immediately after a sale can cause a founder to disengage or leave before critical knowledge has been transferred. A more effective transition allows the former owner to keep running the business while helping prepare and mentor the next leader. Founders often contribute deep expertise in the product, market, sales, or operations, while professional CEOs may bring broader systems, team-building, and management discipline. Preserving both forms of expertise can reduce transition risk and support continuity.
A credible buyer protects the seller by being able to close
A buyer’s credibility should be measured partly by the ability to finance and close a transaction. Business owners may receive frequent acquisition outreach, but not every interested party has the capital, experience, or relationships needed to complete a deal. Warm introductions, trusted advisor validation, a record of completed transactions, and realistic valuation expectations provide stronger signals than polished outreach alone. A failed process can consume time and diligence expense, distract management, unsettle employees, and create questions for future buyers. Screening buyer credibility is therefore part of protecting the company’s value, not merely an administrative step.
Questions Addressed in the Conversation
What is an independent sponsor?
An independent sponsor raises debt and equity for each acquisition rather than investing from a committed fund. The sponsor identifies a company, assembles financing and investor capital for that transaction, and holds the investment on its own terms. The model resembles an entrepreneur raising money from a network to buy a business, but it is repeated through established lender and investor relationships.
How is a typical lower middle market acquisition financed?
A typical transaction combines senior bank debt, possible subordinated debt or seller financing, and equity. In the episode’s hypothetical $18 million acquisition, the structure includes roughly $9 million of senior debt, up to $3 million of mezzanine debt or a seller note, and about $6 million of equity, plus transaction costs and operating cash. Each layer carries a different level of risk and repayment priority.
From the Conversation
“It’s all about trust. You want to buy from someone who cares about the company, their legacy and employees, and what they built over many years.”
-
This transcript has been edited for clarity and readability. Please refer to the original podcast recording for the complete conversation.
Understanding the Independent Sponsor Model
John Warrillow: Sequoya Borgman, welcome to Built to Sell Radio.
Sequoya Borgman: Thanks for having me. Nice to be here.
John: It’s great to have you. You’ve done 19 acquisitions and had two exits, so you’re obviously a very active acquirer. We’ve had the opportunity to talk to lots of different acquirers lately. A couple of weeks ago, we talked to Rick and Royce, who run the Harvard program on entrepreneurship through acquisition, or ETA. They gave us a perspective on ETA. We had Jordan Dubin, who came on and talked about the roll-up he’s doing in garage doors, which is sort of a private equity play. We’ve had Adam Coffey talk about large-scale private equity. We’ve run the gamut, and they are literally some of our most popular episodes.
You’ve done this in a very unique way, so I wanted to dig into your business model. Can you describe where you fit in that landscape of acquirers? What kind of acquirer are you?
Sequoya: We’re kind of a hybrid model. Technically, the term used these days is “independent sponsor.” At one point, they were referred to as fundless sponsors. We raise the money to buy a company on a deal-by-deal basis. We launched in 2017, and over that period we’ve acquired 19 companies. We have two more that we’re working on closing shortly, so we’ll be over the 20-acquisition hurdle soon.
Sequoya: With each acquisition, we line up the debt and investors in a separate pool. A traditional private equity firm would raise a fund and acquire, say, 10 to 12 companies through that fund’s life cycle, usually about 10 years. We don’t have a set life cycle for each investment. I’d say we’re more opportunistic when it comes to finding nice companies to buy.
John: What is the origin of the term “independent sponsor”? It’s one of those buzzwords I’ve heard before, but I have no idea what it means. What makes you independent, and what makes you a sponsor?
Sequoya: I think all investors—and especially all private equity investors—are sponsors. They’re sponsoring the acquisition of a company. The “independent” part comes from the fact that, rather than raising a fund through institutional investors, we raise the money to buy a company on a company-by-company basis. It’s really no different than an entrepreneur trying to buy a business. If they didn’t have the funding to acquire it on their own, they’d go to their network or to investors and raise the money.
Sequoya: We’ve done that over the last eight years. We have almost 500 limited partners—family offices, high-net-worth individuals and accredited investors—who have invested with us in the 19-plus acquisitions we’ve done over that period.
John: So you’ve cultivated this group of buyers—high-net-worth individuals and family offices—that you’ve got on speed dial. When you find a deal, you reach out to that community and say, “Is anybody interested in doing this deal?” I’m oversimplifying, I’m sure, but is that the basic business model?
Sequoya: Basically, that’s what it is. A lot of investors would love to invest in a lower-middle-market business. It’s not as easy as investing in the public stock market or in a fund. Our investors appreciate having access to a business investment because a lot of individuals’ net worth is built through owning equity in some type of entrepreneurial venture.
Expanding Investor Access to Private Businesses
John: Over the weekend, I heard about two examples of websites that sound like they’re trying to do online what you do offline. They aggregate people who want to invest in the purchase of a small business. If you have extra money or you’re a family office, you can use the website to find a deal. Are you seeing increasing competition from online versions of what you’re doing, or is it not having much impact on your core business model?
Sequoya: There have been a lot of websites and aggregators in the venture space—more startups and early-stage businesses—and a lot in real estate. But there are very few ways to get access to lower-middle-market, cash-flowing, established businesses, including family-owned and entrepreneur-led companies.
Sequoya: A lot of the larger private equity firms—the Blackstones, Carlyles and KKRs of the world—are setting up platforms that give retail investors access. They’re aggregating those investors primarily through RIAs and wealth managers, which allows high-net-worth and accredited investors to access these types of investment opportunities.
Sequoya: Within the last year, we launched a platform called PassTheHat.com. We list all of our deals on that platform when we bring them to market. We have a fund administrator that runs the software and handles the back-office accreditation, investor relations and reporting. But the front end—PassTheHat.com—is our proprietary platform.
John: As this becomes—although I hate to use the overused term—democratized, I’d imagine the buying pool is getting diluted. In the early days, I thought of people who bought businesses as sophisticated private equity investors. Now these sites let people buy small tranches of small businesses at relatively low investment levels. Are you noticing that the buyer pool is less sophisticated than it used to be?
Sequoya: The traditional private equity investor has always been a large institutional investor: pension plans and large capital allocators. Traditionally, they were the ones who had access to these investment opportunities. But it is coming down-market, especially for smaller deals. Very wealthy or highly successful individuals may do very well but not have the access that an institutional investor would. Now they’re starting to get access to these alternative investments.
Sequoya: They’ve always had access to real estate and venture—some of those higher-risk investments. But for established, lower-middle-market, traditional, cash-flowing businesses, retail investors had very little access unless they knew someone like me, someone in private equity or someone raising a first-time fund.
Sequoya: Business owners build most of their net worth from the businesses they own, so they like investing in other businesses. They understand the risks, the market cycles and the longer-term illiquidity. They see that a lot of the country’s net worth and equity has been built by owning shares in privately held businesses.
John: If I’m honest, the popularity of our “Inside the Mind of an Acquirer” series has been twofold. Would-be sellers are interested in the other side of the negotiating table: How do buyers think? What do they do? But I agree that they may also be thinking, “Maybe I’ll buy a business when I retire,” or, “Maybe I’ll buy a tuck-in acquisition that will help me get to the next level.” They’re coming to these episodes wearing two different hats.
What a Typical Borgman Capital Deal Looks Like
John: Talk to me about a typical Borgman deal. If you’re going to invest in a lower-middle-market business, what size does that translate to in terms of EBITDA or revenue?
Sequoya: There are all kinds of definitions for the lower middle market. Our focus is below the larger firms and the more competitive company sizes. All of our acquisitions have been under about $200 million in revenue and under $20 million of EBITDA. We’re really more focused on established businesses in older industries—manufacturing, distribution, food and similar industries.
John: That’s a huge range. To give you a sense of our listeners, I think they run the gamut from $300,000, $400,000, $500,000 or $600,000 of EBITDA up to $2 million or $3 million. I imagine 80% of our listeners fall in that window. That’s the lens I’m using as we continue: a company with $1 million or $1.5 million of EBITDA that may be just south of the first tranche of traditional private equity but still wants a professional exit and a good outcome. Would you play in that space?
Sequoya: Of course. Those businesses are great. As an owner, I’d love to own them personally because they have really nice cash flow. Usually, they have a very good niche. There are often quite a few competitors, so they’re ripe for roll-up opportunities, consolidation and integration with others in the space. It’s a very good place to be.
John: Of the 19 deals you’ve done, what proportion fall below $2 million of EBITDA?
Sequoya: Very few are below $2 million of EBITDA, and most of those are add-ons. If we already have a platform with $3 million, $4 million or $5 million of EBITDA, it’s perfect to do a $1 million, $1.5 million or $2 million EBITDA add-on.
Sequoya: I love those businesses, but when you buy a company with $1 million of EBITDA and you have acquisition costs and debt service, you usually don’t have the cash flow to pay a professional president to run it—or to pay the previous owners. Add-ons are easier because you’re already paying a professional president to run the overall organization. You’re looking at those $1 million-to-$2 million EBITDA businesses to enhance the organization, add a territory or product line, or give the business something that would take time to grow organically.
Aligning Management Incentives and Investor Returns
John: You mentioned that a business below that size wouldn’t necessarily support the cost of bringing in a professional CEO. What would you pay a professional CEO—not an owner, but a manager—to run a business with $3 million to $5 million of EBITDA?
Sequoya: We like to incentivize our presidents and CEOs with equity. We usually set aside a portion of the equity in an acquisition for the president and management team. We want anyone creating value in the business to own part of it. That’s really key to us. In these lower-middle-market businesses, it’s all about the people.
Sequoya: The base salary is usually something reasonable—perhaps $200,000 to $300,000 for the smaller companies. Incentive compensation is tied to growing cash flow and the value of the business. Equity is tied to creating value for us and our investors. If an individual creates value above normal investor returns, they can earn a large portion of that equity themselves.
Sequoya: We want people who are in it for the long-term upside, who want to build something, be part of something pretty cool and do something great for a business.
John: The CEO you’re looking for is someone who can create returns that are better than the benchmark. What benchmark do you use? Is it the economy growing at 3% or 4% a year, or the company’s industry?
Sequoya: At the end of the day, my fiduciary responsibility is to our investors. It’s really the investor hurdle we’re trying to clear, not necessarily the company’s growth. Before COVID, the economy traditionally grew at 2%, 2.5% or 3% a year, and every company can’t grow faster than that.
Sequoya: To get a 20% return on an investment in a company growing at that rate, you can increase margins, grow EBITDA, grow the top line or use leverage. Traditionally, in private equity and for most buyers, a lot of the return is based on the leveraged-buyout model. You use bank debt for part of the purchase price, pay it down, and it turns into equity and improves your returns. It’s similar to buying stock in a margin account. If the stock does well and you’re using margin, your returns exceed the stock’s return.
John: You mentioned 20%. Would that be a typical annual return expectation for an investor in one of your deals?
Sequoya: That would be very reasonable. Returns have come down a little over the last decade because it’s more competitive for buyers, multiples are up and interest rates are up. That puts pressure on returns. But for an acquisition, you’d want high-teens to low-20% returns to make it worthwhile, given that your equity is tied up for a longer period and it’s a higher-risk investment than Treasury bills or some other lower-risk opportunity.
John: As you shop these deals to investors—family offices, wealthy individuals and others—are you building the model to show that if someone invests $1 million and the company hits certain milestones over five years, that investment could become $2 million or $2.5 million? Or do investors build the model themselves?
Sequoya: We build the models. They’re typical leveraged-buyout models, and we’ll create a base case, an upside case and a downside case. But I’ve never seen a model over a five- or 10-year hold period turn out exactly as expected. As any business owner knows, it’s not a straight, easy line.
Sequoya: We use our best-case judgment, do the research and diligence, and put together an expected model. If it meets our minimum investment hurdles, we move forward. My partners and I invest in every deal ourselves. The more exits we do, the more we roll into the next one. I was the largest investor in some of the deals we did last year because we had a liquidity event right before those businesses were acquired. We’re only buying companies that we strongly like ourselves.
Structuring a Leveraged Buyout
John: Let’s walk through a hypothetical deal: a commercial carpet-cleaning business in the Southeast with $20 million in revenue and $3 million of EBITDA. How would you structure it? What would the capitalization look like? How much would be debt and equity, and who would provide the money?
Sequoya: We would look up the industry multiples using GF Data from ACG. For a company that size, the range is probably four to seven times EBITDA. If we paid six times, a $3 million EBITDA business would cost $18 million.
Sequoya: The leverage available today has come down a little. We might use three times senior leverage, or about $9 million—roughly half the purchase price.
John: Senior leverage means bank debt that gets paid first if things go badly.
Sequoya: Yes. I’ve sat on the board of a bank, and banks always get paid first. Equity holders get paid last. Two to three times EBITDA is probably the range a bank would lend—$6 million to $9 million. Three times might be a little strong for a company that size.
Sequoya: We might add another half turn or full turn of subordinated or mezzanine debt. A turn means another multiple of EBITDA, so half a turn to a full turn would be $1.5 million to $3 million. That higher-risk, higher-rate debt could come from a mezzanine fund, a subordinated debt fund or sometimes the seller through a seller note.
Sequoya: Seller financing is more common these days because of where banks and interest rates are. From a buyer’s standpoint, having the seller provide that financing is more favorable than using a higher-rate debt fund.
Sequoya: The rest would generally be equity. If the carpet-cleaning business had customer concentration—one especially large customer, for example—some of the consideration might be an earnout tied to that risk. A normal funds-flow capitalization might be about 50% debt and 50% equity, plus transaction costs for attorneys, accountants, outside due diligence and bank fees.
John: Let me summarize. The hypothetical purchase price is $18 million: $3 million of EBITDA multiplied by six. There could be $9 million of senior bank debt and $3 million of mezzanine debt or seller financing, leaving $6 million of equity. That equity could come from you and your partners or from other investors. Is that right?
Sequoya: That’s correct. We might put in additional equity to cover closing and transaction costs. We also often close with cash on the balance sheet. Most businesses are bought debt-free and cash-free, so we might put another $500,000 or $1 million into the business to provide operating cash on day one.
John: If one person wrote the entire $6 million equity check, would that person own 100% of the equity?
Sequoya: Correct.
John: If all goes well and, 10 years later, EBITDA has doubled to $6 million, the debt is paid off and the business is worth seven times EBITDA, that’s a $42 million business. The original $6 million investment would be worth $42 million.
Sequoya: Exactly. That would be a huge return over a 10-year hold. I’d love that business. Let’s go find it.
When an Investment Does Not Go as Planned
John: That’s if everything goes swimmingly. But sometimes it doesn’t. I read your 2024 newsletter, and although it was a great year overall, you said something like, “We learned Warren Buffett’s golden rule once this year.” The rule is: Never lose principal. Are you willing to share, anonymously if needed, what went wrong? On paper, this can sound like a license to print money.
Sequoya: It’s not easy at all. I call them my problem children because, when you own 19 companies, one is always going through some kind of cycle. They’re never all firing on all cylinders at once. One that had issues four years ago is now our best-performing investment.
Sequoya: As business owners know, a small business doesn’t grow in a straight line every year. The last four years have included COVID, its aftermath and uncertainty in the economy. There are always challenges.
Sequoya: We had invested in a business about six years earlier that was very focused on telecom. The telecom sector slowed last year. The management team and everyone involved worked hard to get through it, but sometimes the economy, the sector, the customer or rising interest rates create issues beyond your control. That was one of the stressful situations we were in last year.
John: What did you do?
Sequoya: We sold the business. It wasn’t a great investment. They’re not all home runs. The two we sold the year before were home runs, but buying businesses is not easy. When banks, lenders and others sit ahead of you in the capital stack, business cycles create a lot of stress. You put your head down, do the right thing and stick to business fundamentals. Most of the time, you get through it.
Bank Covenants, Impairments and Downside Risk
John: I’ve heard the term “covenants,” but I’d like a layperson’s explanation. Going back to the $3 million EBITDA cleaning company with $9 million of senior debt, what conditions would the bank impose? Would there be a personal guarantee?
Sequoya: Usually not in our deals. When you’re syndicating to other investors, it’s difficult to provide a personal guarantee.
John: Would the bank have recourse to the other 18 companies in your portfolio if one deal went sour?
Sequoya: No. They all stand alone. The banks we work with are cash-flow lenders. They lend based on the metrics and credit of that particular business. That’s where their collateral is, and that’s what the covenants are tied to.
John: What is an example of a covenant?
Sequoya: They’re usually tied to debt service or leverage. If the business had $3 million of EBITDA and $9 million of bank leverage, the bank might require EBITDA not to fall below $3 million. If it did, you’d be outside of covenants, which is not a good situation.
John: So the bank gives you an umbrella when it’s sunny and asks for it back when it’s raining. If EBITDA falls because of the economy, tariffs or other factors, the owner and CEO already know there’s a problem. How do you coach someone through a bank saying they’re outside of covenants?
Sequoya: I look at it from the bank’s standpoint. What the bank lends is like inventory in a business. If the value of that inventory declines, you’ve already committed the cash. You may as well liquidate it or sell it for what you can get, even at a loss, because it’s taking up working capital, resources, time and effort that could be used elsewhere.
Sequoya: Once a borrower is outside of covenants and the bank has to impair and write down the loan’s value, that loss hits the bank’s financial statements. The bank wants to get out of the situation. It doesn’t want to spend more time and effort or tie up more capital in the loan.
John: Are you saying the bank would actively encourage a sale or bankruptcy if the business were outside of covenants?
Sequoya: Usually, the bank would want to sell or liquidate the business.
John: Wouldn’t that happen at a deep discount? Suppose the business falls from $3 million to $1 million of EBITDA. It’s still profitable, but it’s outside of covenants.
Sequoya: From the bank’s standpoint, if the business falls from $3 million to $1 million of EBITDA, the $9 million loan may now be worth only $3 million—three times the new EBITDA. The bank has already taken a $6 million bad-debt charge-off through its financial statements. In a later quarter, anything it recovers above $3 million is a plus. If the business sells for $3.5 million, that could create a $500,000 positive effect on the bank’s income statement.
John: The bank is required to take that impairment as soon as it knows the business has dropped to $1 million of EBITDA?
Sequoya: As soon as the covenants are violated, the bank is required to address the impairment. Banking is a highly regulated industry; banks don’t have leeway to avoid impairing those assets.
John: If Borgman Capital has invested in a company like that, you’re trying to negotiate with the bank and ask for time to fix the problem because you don’t want to sell at that valuation.
Sequoya: Yes, and the bank wants to work with you, too. Banks aren’t evil institutions, and private equity isn’t evil. We don’t want to overleverage businesses. We want the business to succeed. But cycles and bad things happen.
Sequoya: When they do, you have to be open and honest with the bank. Whatever projections or turnaround plan you give the bank, you need to meet them. Banks become concerned when things keep deteriorating or they don’t see a short-term turnaround in the market. They’re doing what’s best for their investors, employees and business, no different than a business owner would be doing for their business if you had a...
John: In our example, the business sold for $18 million, with $9 million of senior debt and $3 million of seller financing. That seller note is subordinated to the bank. If the bank forecloses, the seller could lose that $3 million unless something unusual happens.
Sequoya: Yes. A lot of times, though, the bank will reach out to the former owner. Even if the former owner has $3 million tied up, they may have walked away with $15 million. They could buy the business back or step back in. Usually, the former owner knows the business better than any professional president. I’ve seen former owners buy a business back from the bank or put in more equity at pennies on the dollar.
John: They know where all the bodies are buried. They can right the ship, get EBITDA back to $3 million and sell again. We’ve heard stories of people buying back their businesses for pennies on the dollar. You’re describing how that can happen.
Sequoya: It also means the original buyer didn’t do a very good job—perhaps they overleveraged, overpaid or tried something that wasn’t in the business’s best interest.
How Private Equity Creates Value
John: When you buy a business, what’s your thesis? Adam Coffey has talked about three ways private equity firms traditionally make money: professionalizing the business by adding management rigor; creating synergies, such as consolidating administrative functions in a roll-up; and multiple expansion, because larger businesses often sell for higher multiples. Do you agree those are the three main levers? Is there a fourth? Which do you rely on most?
Sequoya: Those are the three that come out of the playbook most often. To some extent, though, they’re all financial engineering. Professionalizing the business really means making it more attractive to a larger buyer—someone who doesn’t want to roll up their sleeves and do the hard work of putting systems, processes and a professional management team in place. That work does add value.
Sequoya: There can be synergies in a roll-up, but there are also costs. Systems, processes, procedures, documentation and management teams all cost money. I don’t always count on synergies; they’re more of a nice-to-have.
Sequoya: Over the previous decade, multiple expansion was one of the largest sources of returns for private equity and other investors. If you can buy at six times and sell at seven times—and the next buyer can sell at eight—you can make money over a shorter period. But you can’t count on that now. Multiples have come down or stabilized.
Sequoya: You have to create value by growing margins, the top line or EBITDA while also professionalizing the business. Most people aren’t modeling multiple expansion now. With multiples and leverage coming down, you also can’t get as much return from the financing side.
John: You mentioned management rigor. Are you thinking of the kind of training and operating discipline associated with GE Crotonville?
Seller Rollover Equity and Transition Planning
John: When Borgman Capital buys a business, do you try to get the owner to roll equity, reinvest alongside you and continue running the company?
Sequoya: We do. You want the former owner to have skin in the game. They may have run the business for 30 or 40 years and know it inside and out. There’s nobody who knows it better. It takes us or a professional president a couple of years to understand all the nuances and the culture. Having the owner help—and remain highly incentivized to ensure the business continues to succeed—is key. About 80% of our sellers roll equity, usually around 20%.
John: How do you keep them motivated? In our hypothetical example, if the sale price is $18 million and the owner rolls about $4 million, they receive roughly $14 million in cash. If they’re 60 and want to travel, how do you keep them as motivated as when they were trying to make payroll? Their basic needs are permanently solved.
Sequoya: It’s tough. If an employee wins the lottery, what are the odds they’ll come to work the next day just as motivated? Most would resign and never return.
Sequoya: It’s all about trust. You want to buy from someone who cares about the company, their legacy and employees, and what they built over many years. If someone cares only about the money and plans to ride off into the sunset, that usually isn’t a business you want to buy. There’s too much risk.
Sequoya: One of the biggest risks for an investor is buying a business and transitioning it to a new leader, president or CEO. If we’re not very comfortable that the owner has our interests and the business’s interests in mind—and will help with a transition that may not go smoothly—we usually won’t invest.
Sequoya: I also ask what the owner plans to do with the money. If they’re going to buy an island in the Caribbean and disappear, they won’t be there to help through the hurdles, especially during the first year or two when the business is highly leveraged. The initial transition and the initial leverage are the two biggest risks in a leveraged buyout. You want an owner who will help you through that period.
Why Owners Sell - and What Buyers Listen For
John: Every seller eventually gets asked, “Why do you want to sell?” What’s a good answer, and what would make you run the other way?
Sequoya: The best answer is the truth. You can tell when someone is telling the truth versus saying what they were coached to say or what they think you want to hear. If someone explains honestly why they want to sell and transition, you can work together before closing on a plan that mitigates the risk and helps the transition go the way the owner wants. If we try to force something on the owner or management team, it usually doesn’t work. I want the seller to tell me the truth, and then we’ll work together on a plan.
John: What if the truth is, “I’m afraid AI will put this business out of business. I’m tired. I’m exhausted. My employees are driving me crazy”?
Sequoya: That might be a harder business to sell. It could scare a lot of people off. Being the leader of a small business is one of the loneliest and hardest roles there is. A lot of people want to be a president, CEO or business owner, but they have no idea how hard, stressful and lonely the position can be. You often can’t share many of your concerns with coworkers and employees because it would frighten them.
John: Let’s role-play. You ask why I want to sell this $3 million EBITDA business, and I say, “I’m tired. I’ve been doing this for 27 years, and I’m tired.” What are you hearing?
Sequoya: That’s great. We can address it. We can hire someone with energy and motivation to get the business to the next level. I love businesses where the owner is tired at $3 million of EBITDA. They may be pulling out $1.5 million or $2 million a year, living a nice lifestyle and carrying very little debt. They have little motivation to grow because growth takes more work, time and risk, and requires leaving more money in the business or reinvesting. Those are great businesses to invest in.
John: How would you convince me to sell? If I said, “I’m pulling out $1.5 million a year, working 30 hours a week, traveling and running expenses through the company. I’m not going to sell for five times,” how would you respond?
Sequoya: I can’t argue with that. If I were truly in that situation, I’d feel the same. My suspicion, though, is that when most owners say they’re barely involved or work only 20 or 30 hours a week, that isn’t really the case. Business owners are on call 24 hours a day. Even on vacation, they handle the issues no one else can resolve—the things nobody wants to deal with.
Sequoya: I know those stresses personally. Some people would rather have a lump sum they can live on comfortably for the rest of their lives and no longer carry the daily stress of owning and running a business. Employees’ livelihoods and well-being depend on you doing the right things for them. That’s a lot of stress.
John: What if someone says, “I appreciate that you want me to roll equity, but I don’t play well in the sandbox. I’ll run the company independently, but I’m not staying for a five- or seven-year transition. I’m a lone wolf”?
Sequoya: I love it, because that describes 99% of entrepreneurs. They became entrepreneurs because they didn’t want to report to or work for someone else. They wanted to make the decisions. I know that when I buy a company.
Sequoya: That’s why there is usually a transition period. While the former owner is still running the company, we don’t micromanage or tell them what to do. They know how to run the business. We’re happy they let us invest. When they’re ready to transition and help us bring in and mentor someone who can step into the role, we’ll address it.
Sequoya: We don’t force a game plan on an entrepreneur, because that’s the easiest way to make them throw in the towel and walk away. Even if some incentives, rollover equity and earnout remain, half the purchase price may be enough for them to live on for the rest of their lives.
Founders, Professional CEOs and Leadership Transitions
John: What’s the difference, in your experience, between a professional CEO and a founder?
Sequoya: A professional CEO has usually come through a strong management training program. They know how businesses are run, what resources to bring in, how to use KPIs and different management styles, and how to operate a business.
Sequoya: Founders and entrepreneurs are usually exceptionally good at one or two things. They may be great engineers, product people or salespeople. Professional managers typically aren’t as deep in any one area. They build teams beneath them, bring in higher-level finance, sales and operations resources, and focus on motivation, leadership and strategy. Most entrepreneurs are very good at the thing that made the company great.
John: I asked Rick and Royce, who lead the entrepreneurship-through-acquisition program at Harvard Business School, about the difference between MBA graduates who buy a company and the founder they buy it from. We had a hearty debate about who is better suited to lead the business.
Search Funds and the Competitive Buyer Landscape
John: I imagine ETA buyers, particularly sponsored-search buyers, compete with Borgman Capital for deals. Are you encountering a lot of noise from that model?
Sequoya: I’m a big fan of the model. I meet with many search funds and people coming out of MBA programs. I wish I had known about it at that stage of my career. If I had known 20 or 25 years ago that I could do that, it would have been a great launching pad. It simply wasn’t a common path then.
Sequoya: We see many deals that are too small for us or otherwise not a good fit but would be perfect for a search fund, so we share them with people in that space. The reverse happens, too: They may find something too large for their model or not suited to them, and we can partner or receive an introduction.
Sequoya: I don’t see them as a problem. My peers do the same thing. There are roughly 4,500 private equity firms and another 1,400 or 1,500 independent sponsors. A lot of people are trying to buy companies, so every business owner probably gets a couple of calls a day or a week.
Sequoya: Search fund buyers are especially good at cold outreach. They’re highly motivated because they often have a one- or two-year window to complete a deal before they need to get a traditional job. They work their networks, make calls and send emails to find good opportunities.
How Sellers Can Identify a Credible Buyer
John: Our listeners are inundated with people posing as business buyers. I use “posing” intentionally. There are charlatans who put owners under a letter of intent, frantically try to raise money despite having never done it, stretch diligence out for a year and leave the owner worse off. How do you differentiate yourself? How can an owner tell you’re legitimate rather than one of the many people who have no business buying a company?
Sequoya: We see it all the time. We’ve bought three or four companies after an owner became tied up with a buyer under a letter of intent who couldn’t finance the transaction. Either they couldn’t raise the equity, or the terms were so aggressive that no investor or lender would support them. Then the buyer had to go back and renegotiate with the owner, which never works well.
Sequoya: I’m upfront and honest about what I think a business is worth, and I know what we can get done. At this point, we’ve completed 19 acquisitions, so we’ve done something right. Sometimes I prefer not to be the first person speaking with an owner. They may have heard at the country club that a friend sold for 20 times earnings, and that becomes their expectation. After they speak with three or four legitimate buyers—or work with a strong investment banker, broker, attorney or other advisor—they understand the real market.
Sequoya: That’s why we rely on GF Data from ACG for market multiples. It shows what businesses are actually selling for. Search fund buyers often pursue smaller companies, and SBA financing can help with businesses under $5 million in purchase price. A young, hungry and motivated MBA can be a great buyer. Many owners started their companies in their 20s, and it took a long time to build them. It doesn’t happen overnight or in two to five years.
John: What cues do you use to show that you’re legitimate? Borgman Capital has a professional website, a polished newsletter and a credible LinkedIn presence. What else helps owners distinguish a real buyer from the noise? I want listeners to have a practical checklist for deciding whether to take a call.
Sequoya: The number one thing is that most of our outreach and conversations with owners come through warm introductions—from one of their trusted advisors or one of our investors. We aren’t making cold, spammy calls to business owners.
Sequoya: Friends who own businesses often call and ask whether a group that contacted them is legitimate or what I think of a firm rolling up companies in their industry. Even though there are many firms, the deal community is small. We talk to each other and use many of the same M&A advisors. From my standpoint, it’s usually easy to find out whether someone is legitimate.
Sequoya: I would avoid a lot of the cold, spammy email outreach. With AI, I receive dozens of messages every day through LinkedIn and email that aren’t worth my time. Business owners receive even more because owning a good business is many people’s dream.
Sequoya: Many midcareer executives would love to buy a business, but the question is whether they have the resources. Owners should not spend a year in a process that goes nowhere. They may spend money on diligence, become distracted from running the business and unsettle employees who learn about a potential sale and become concerned about their jobs.
Sequoya: That is one of the most important roles of an investment banker or broker: confirming that a buyer is legitimate, has the capital and has the relationships needed to get the transaction over the finish line.
John: An M&A professional once told me that screening out illegitimate buyers—people who can’t get the money—is their number one job. If a deal breaks, it can hurt the company’s value. Other buyers may wonder what the failed buyer found during diligence, even if the problem had nothing to do with the company. That can undermine the next transaction.
John: I appreciate you sharing your perspective. If people want to reach you or learn more about the firm, where should they go?
Sequoya: I’m on LinkedIn, and people are welcome to reach out there. They can also visit the Borgman Capital website. Potential investors can visit PassTheHat.com.
John: We’ll include PassTheHat.com, Borgman Capital and your LinkedIn profile in the show notes at BuiltToSell.com. Sequoya, thanks for doing this.
Sequoya: Thanks for having me. This was a great conversation.
