Lower-Middle-Market Private Equity for Individual Accredited Investors
On the Wealth Independence Podcast, hosts Dustin Bailey and Adam Penn spoke with Sequoya Borgman, Founder and CEO of Borgman Capital, about opening direct lower-middle-market private equity access to individual accredited investors. Sequoya traces his path from an 18-year public accounting career into private equity and explains how Borgman Capital structures deal-by-deal leveraged buyouts of established, founder-owned businesses. He highlights the operational requirements of replacing concentrated founder knowledge, the mechanics of capital stacks, and how avoiding the pressure of a traditional committed fund allows the firm to maintain valuation discipline.
Listen to or watch the complete conversation with Sequoya Borgman on YouTube or through your preferred podcast platform.
Key Takeaways
No Committed Fund Pressure Preserves Valuation Discipline
Operating without a traditional committed fund allows an investment firm to evaluate opportunities based solely on merit rather than deployment mandates. Borgman Capital reviews roughly 1,200 opportunities annually to execute one to four transactions. Because the leadership team co-invests personal capital in every deal, the decision to proceed requires confidence in the individual transaction’s fundamentals. This independence protects investors from overpaying for clean, highly competitive assets where auction dynamics compress return potential.
Replacing Founder Knowledge Requires Operational Infrastructure
Acquiring family- or founder-owned businesses in the lower middle market involves managing concentrated transition risk. In many founder-led companies, decades of operational insight reside solely with the owner. Transitioning these companies requires hiring multiple specialized leaders, such as a new president or CFO, and implementing systems like ERP software. Larger institutional investors often avoid this level of heavy lifting, creating opportunities to acquire stable, cash-flowing businesses at reasonable multiples.
Responsible Debt Structure Protects Leveraged Buyout Returns
Debt enhances equity returns when steady cash flows pay down principal, but it represents the primary operational risk in a buyout. A balanced capital stack typically layers two to three times senior bank debt with subordinated debt, mezzanine financing, or seller notes above the equity. Seller notes align seller and buyer interests over time while providing favorable debt terms. Keeping senior debt moderate ensures the business generates sufficient cash flow to service its obligations across changing economic conditions.
Special-Purpose Vehicles Enable Direct Deal Access and Flexibility
Using special-purpose vehicles (SPVs) under Regulation D allows individual accredited investors to participate in direct lower-middle-market transactions. Platforms like Pass the Hat automate onboarding, accreditation verification, tax reporting, and investor communications for these offerings. Furthermore, SPVs operate without fixed fund lifespans, allowing hold periods to align with operational value creation and tax optimization—such as qualifying for Section 1202 Qualified Small Business Stock (QSBS) benefits after five years—rather than arbitrary fund closing deadlines.
Questions Addressed in the Conversation
How can accredited individual investors access lower-middle-market leveraged buyouts?
Accredited investors can access direct lower-middle-market buyouts through special-purpose vehicles structured under Regulation D offerings. Borgman Capital created the Pass the Hat platform to streamline this process, managing third-party accreditation verification, investor relations, fund administration, quarterly reporting, and tax documentation for over 500 accredited investors.
What makes acquiring founder-owned businesses challenging for private equity buyers?
The primary challenge in founder-owned acquisitions is that institutional knowledge is heavily concentrated in the owner's head. Replacing a founder often requires hiring three or four professionals—such as a new president and CFO—alongside investing in enterprise resource planning (ERP) systems and formal infrastructure.
How does leverage drive returns and create risk in a private equity acquisition?
Leverage enhances equity returns when a company's cash flow pays down debt principal over time, effectively increasing equity value without requiring immediate revenue growth. However, debt also represents the primary risk in a buyout; if cash flows fall short and cannot service the debt, the investment faces distress. Managing this risk requires balancing senior leverage with seller notes or subordinated debt.
From the Conversation
“If we see a deal and love it, that probably means everybody loves it, so you’re going to overpay. If you’ve ever read The Winner’s Curse, that is very true in our business. If everybody loves a deal, there’s no hair on it and nothing that needs to be fixed, so you’re going to overpay and your returns will probably be much lower. I’d rather buy a business where you understand the risks, know going in what needs to be fixed, and enter at a fair multiple with much more upside.”
-
This transcript has been edited for clarity and readability. Please refer to the original podcast recording for the complete conversation.
From Public Accounting to Private Equity
Dustin: Sequoya, happy to have you on the show today. We’d love to hear a little more about your background and what you work on day to day. Do you want to start by telling our audience a little about yourself?
Sequoya: Sure. Thanks for having me on the show. I’m happy to tell you a little about myself. I started in public accounting about three decades ago. I joined Arthur Andersen out of college after earning my master’s in accounting and spent 18 years in public accounting. After Andersen went down, I went to a couple of other big firms.
It looks like we overlapped at Deloitte a little bit, Dustin. It was great training and a great experience. That’s where I was introduced to the transaction and M&A space. Ultimately, I got to work with some great private equity firms around the country, work on some of their transactions, help structure them, and really got the bug—the itch—to do it myself.
Almost a decade ago, I decided to jump to the other side of the table and launch a firm. I really haven’t looked back. I wish I’d done it earlier in my career, but it has been a great run over the last decade or so. We’ve bought more than 20 companies and built a really nice practice throughout the country. I’m excited to be doing what we do.
Investing in Founder-Owned Businesses
Adam: That’s awesome. On the merger and acquisition side, this isn’t a space everyone hears about all the time or works in themselves. Can you walk us through what some of those transactions might look like or what your typical deal looks like?
Sequoya: There are thousands and thousands of different groups doing similar things in the space, but we focus on the lower end of the middle market. We’re value investors investing in family- or founder-owned businesses that have been around for decades and have an established business model. Maybe the second or third generation isn’t interested in running the business, and the owners are looking for a succession plan.
We’ll be part of that succession plan. We’ll come in and invest in the business, either by buying all the equity or a large majority of the equity. Then we’ll help transition it to a professionally managed business as the owner transitions out over time. We’ll bring in a new president, maybe a new CFO, and, depending on the management team, perhaps add other resources as well.
Opening Private Equity to Accredited Investors
Adam: That is definitely helpful for people trying to transition out, but you also have to bring capital to the table. Can you talk through how you structure the acquisition from the capital stack side?
Sequoya: When I first got into the investment side of the business, that was the part where I lacked experience. I didn’t come from another private equity firm or investment bank where I was used to raising capital. When I started, I went around to my friends and network, and we put together a pool of capital for the first acquisition.
That went really well. We had 26 investors in that original deal almost 10 years ago, and we had a really nice exit and investment. Over the years, our investment network has grown to include family offices, ultra-high-net-worth individuals, and many accredited investors.
For each company we buy, we set up a special-purpose vehicle and make a Regulation D filing. Any accredited investor can participate in that investment offering after a third party verifies the investor’s accreditation. Our investor group grew largely because investors told their friends or other family offices, who then invested with us on the next deal. Before long, we had hundreds of investors.
About three years ago, we invested in launching an online investment platform called Pass the Hat. It is fully targeted to accredited investors who want access to direct lower-middle-market leveraged buyouts—really our bread and butter. It has grown, and now more than 500 investors have invested with us.
The Pass the Hat platform helps with onboarding and automates the process. It supports third-party accreditation as well as the administrative side of the business: investor relations, fund administration, tax reporting, quarterly and annual reporting, and investor communications. It has been a very successful launch. One of our biggest complaints at this point is that we don’t have more investments to put on the platform, but that’s a good problem to have.
Adam: When you started, you needed more investors; now you need more investments. It’s funny how things shift over time.
Sequoya: It does. At the beginning, I never knew how I was going to raise the money. Now that’s the least of the issues. Finding good investment opportunities is really the challenge.
It was a lot easier to do deals in the 2010s. Things have slowed over the last couple of years because of what has been happening in the economy, interest rates, and competition. There is a lot of money going after the same great investment opportunities, so the tide has definitely turned over the last several years.
Finding and Evaluating the Right Deals
Adam: Do you think that just makes deals harder to find, or does it dilute the quality of the deals you’re able to buy?
Sequoya: Since we don’t have a committed pool of capital, we have no pressure to do deals just for deals’ sake. I think some larger funds do face that pressure. Their returns have been coming down as they move down-market, pay more, or put less leverage on a business. All of that affects IRR.
With our model, we invest personally in these deals. If we don’t feel we’re going to get a great personal investment, we don’t pursue it. We have no pressure from a fund or limited-partner base that requires us to do deals for deals’ sake. We look at about 1,200 deals a year to do one, two, maybe three deals—four in a good year. We’re not one of those shops that is extremely active, and that’s one of the nice things about our model.
Adam: You don’t have to give away all your secret sauce, but you take over these businesses, either buying all or a majority of the equity, and help the owners transition out. What does that look like? You’re putting in your own systems and people. What core functions are you able to replace with professional management?
Sequoya: That’s the biggest risk in investing in this part of the market. A lot of the business and institutional knowledge is in the leader’s head, and it’s really hard to bring in one new person to replace that leader. Usually, we have to hire three or four people to replace the one owner, then invest in ERP systems and all kinds of infrastructure and processes that a professional business requires.
But that’s why we’re investing at the multiples we are. A lot of larger investors don’t want to go through that heavy lifting. We’re able to acquire these companies at really good multiples that are fair to the business owner and to our investors. We have to put in the extra time and effort, and perhaps a little extra capital, to professionalize the business and remove that transition risk.
Adam: You’ve been doing this for a long time. You’ve seen a lot of deals, and you’ve said no to a lot of deals. Is there a type of business you would absolutely never buy, or a specific industry you avoid?
Sequoya: We tend to stay away from anything so competitive that it drives the multiples up. If we see a deal and love it, that probably means everybody loves it, so you’re going to overpay. If you’ve ever read The Winner’s Curse, that is very true in our business.
If everybody loves a deal, there’s no hair on it and nothing that needs to be fixed, so you’re going to overpay and your returns will probably be much lower. I’d rather buy a business where you understand the risks, know going in what needs to be fixed, and enter at a fair multiple with much more upside. Those are the businesses we pursue. We tend to pass on spaces that are extremely competitive.
There are also risks we’ll stay away from, as anybody would. Too much concentration and similar risks make deals very difficult to complete. But it’s not really industry-specific. It’s more about the risks in that particular business.
Adam: Do you focus on a certain area, or are you comfortable investing more broadly?
Sequoya: I like industrials. I like food—things with very steady cash flow. It’s the leveraged buyout model, so the businesses pay down the leverage and the debt. You need something with steady cash flow.
We’ve also been very creative and invested in multiple industries all over the country. We’ll look at something and dig in, especially if we’re working with an operator or somebody who has been successful in that space. We put together a professional board of industry insiders who can add a lot of value, and we’ll consider opportunities in areas where we haven’t invested before. If we can understand which levers will meet our investment requirements, we’ll pursue it.
Adam: Awesome. Dustin, don’t let me take all the time here. What questions do you have?
How Businesses Are Valued and Financed
Dustin: I’ve been jotting down some notes. Sequoya, you mentioned multiples, and typically you’re valuing a business on some sort of multiple—EBITDA or modified EBITDA, I would assume. How do you approach valuing businesses, and what multiples do you like to see?
Sequoya: Usually, the lower the entry multiple, the higher the return, so what you pay has a big impact. On some larger deals, studies say value creation has a bigger impact on the ultimate return, cash-on-cash return, or IRR. But in the lower middle market, buying right and using structures such as seller notes, earnouts, or contingent financing have a huge impact on the ultimate return for investors.
We focus on that. A better multiple or better terms can really boost the ultimate return. We track the data. GF Data is a good source for lower-middle-market leveraged buyout deals under $250 million. Most of our deals are under $50 million, so we’re at the lower end of that.
The trends have come down a little, but they’re still around 7.2 times for the types of businesses we pursue. Some high-growth businesses go for higher, double-digit multiples, and some roll-up areas are very competitive and also trade in the double digits. Most businesses we invest in are in the four- to eight-times range, usually based on EBITDA. Sometimes we look at cash flow if it’s a highly capital-intensive business. You’re really paying a multiple of that cash flow, and that has the largest impact on your return.
Dustin: Talking about the capital stack, you mentioned seller notes, earnouts, and similar structures. Do you have a typical structure you prefer, or is every deal unique? For people who have never had exposure to this space, these deals look different from a real estate deal where you have equity and a bank note. Can you explain what the structure typically looks like?
Sequoya: The traditional leveraged buyout has been around forever. You buy a portion of the business with debt, which costs much less than the expected return on equity. Say you buy a business with half equity and half debt. If the business pays down that debt over five years, you’ve doubled your equity value without growing the business. That’s two times your money in five years, which is not a bad investment.
If you’re able to create value—increase EBITDA, improve margins, grow revenue, and pull other value-creation levers—you can get a really nice return in a leveraged buyout. That’s because of the debt used to acquire the business, but the debt is also the risk. If you buy with 70% debt and 30% equity, and the business doesn’t generate enough cash to service that debt, that’s where the risk lies and why the potential return is higher.
It’s always a balance: How much debt can you put on the business without over-burdening it with risk? Our typical structure includes perhaps two to three times senior leverage, traditionally from a senior lender or bank. Then we’ll add perhaps another turn, or one times cash flow, of subordinated or mezzanine debt. That debt is usually interest-only and non-amortizing, or it could be a seller note.
The best financing is through the seller. Sellers know the business best, and if they’ll take some of their proceeds over a longer period and receive a nice interest payment over five or 10 years, that helps our returns and the debt structure. Above that, it’s usually all equity. So, it’s some combination of debt and equity: two to three times senior leverage at the lowest rate, some subordinated debt, mezzanine debt, or a seller note, and then equity.
Sometimes, if it’s a true growth business and there’s upside the previous owner wants to capitalize on, there will be an earnout or another structure through which the seller receives more equity or funds if the business meets certain hurdles.
Holding Periods, Exits, and Tax Considerations
Dustin: What do exits look like, and what is the time frame? Do you typically go into these deals looking to add value and sell at some point, or is the idea to create a portfolio and hold the businesses long term for cash flow?
Sequoya: Because it’s not a fund structure, there is no fixed life. Fund structures usually have a 10-year life, during which you invest and get your funds back, and they often have a two-year extension. These are special-purpose vehicles for each company, so there is no set life. It could be evergreen.
Most of these businesses have been around for 50, 70, or 100 years, and it takes a long time for them to generate a lot of value. We can hold them for a long time. Truthfully, once you deleverage the business, unless it’s growing much faster than the industry or economy, that is probably the best time to sell. That’s when you’ll get your best IRR. You may get a lower cash-on-cash return, however.
We structure all deals we purchase for under $75 million as Section 1202 qualified small business stock, or QSBS, which provides a very good tax benefit if you hold for five years. That has recently changed to provide some benefit after a three-year hold, but you still need to hold for five years to receive the full benefit. We try to hold investments for five years to obtain that tax benefit. It can significantly improve net after-tax returns, and it factors into our timing for an exit.
We’re incentivized to return funds to investors as soon as possible through our carried-interest structure, and the management teams are incentivized as well. If we hold for 10 years, the management teams and our firm don’t get paid until that happens. If we can sell in five years, that provides a higher benefit for us and aligns with investors’ interest in receiving a higher return sooner.
Private Equity’s Role in an Investor Portfolio
Dustin: For an individual investor evaluating this space, where should private equity fit in a portfolio? Is it more growth, more of a cash-flow play, or a little of both? How should someone think about where this sits in a portfolio, and what type of investor is it best suited for?
Sequoya: I see a whole range of alternatives on a risk scale. You move from relatively low-risk real estate deals to riskier real estate investments, such as development deals. We’re below the risk level of angel investing, venture investing, or growth equity, and closer to the lower end when compared with real estate from a risk standpoint.
But the returns are higher. We target perhaps 20% to 30% IRRs before moving forward with a business. That’s higher than real estate but lower than a venture deal—and venture deals are going to have a lot of misses.
We also do some real estate investments. Many of the businesses we buy have industrial property that comes with the business, or the business owner wants to sell the buildings separately from the business, or vice versa. We’ll sometimes set those up as separate investment opportunities for investors as well.
Adam: You talked briefly about the size of business you’re buying. You’re looking in that $50 million range, but is there no opportunity below that, or does it just not make sense to deploy capital? For example, what about a roofing company making $2 million or $3 million a year?
Sequoya: We’ll definitely look at those. Probably $3 million of cash flow is toward the lower end of what we’d consider, but those can be great opportunities. There is a lot of consolidation and roll-up opportunity in that space, and you’re paying a much lower multiple. If you can find a couple of those, that can produce a good return.
We invest under $15 million in most of our businesses. Above that, it gets very competitive. Truthfully, these days it’s competitive above $5 million or $8 million of EBITDA. We find some of the best opportunities in the $4 million to $8 million cash-flow range, which is a little less competitive, although everybody seems to be coming down-market.
We’ll look at businesses with $2 million or $3 million of cash flow, but there may not be enough room for investors. With the number of investors we have, we probably need an opportunity requiring $5 million to $20 million of equity so our investors have room to participate. That’s one of the considerations.
Entrepreneurship, Freedom, and Independence
Dustin: I have two more questions. We’ve talked a lot about the mechanics of private equity, and I could nerd out on this stuff. You had a career in public accounting, then made this transition and said, “Why didn’t I do this sooner?” What was that transition like? Was it tough? Had you been thinking about it for a long time, or was something holding you back from moving from the employee route to doing your own thing?
Sequoya: It was a big risk. I had been a partner for quite a while, and partners at big firms have pretty good lives. I can’t say it isn’t stressful or that you don’t face client expectations and deadlines, but I couldn’t see myself doing that for the rest of my career. I had another 20-plus years in my career and wanted to do something more entrepreneurial—something for myself. I saw this opportunity and made the leap.
It wasn’t easy. My wife certainly had some stress over the whole thing, but it worked out. The first deal I had fell apart. The owner decided not to sell about a week before closing. Fortunately, I found another opportunity soon afterward, started building out the team, and moved forward.
I’d say the biggest factor in our success was having good investment opportunities right off the bat. I know other people who have tried something similar and weren’t able to find anything in the first couple of years. If you don’t have significant savings, you’re not making money while you’re doing this. Truthfully, until you start selling businesses in private equity, you don’t make money buying businesses. You’re investing your time and effort, and you have to invest in every deal so you have skin in the game.
There is a lot of cash outflow during that startup period, but there is a lot of upside as well. You learn something new every day. You meet with business owners and hear their stories about how they created something really cool. You see the ups and downs they experienced through the business cycle. Walking through facilities and seeing how things are made—that’s fun. I could do that every day. I don’t miss public accounting at all.
Dustin: That’s awesome. We ask every guest this. We’re the Wealth Independence Podcast, and the words “independence” and “freedom” mean a lot to Adam and me. What do those words mean to you? How do you live that in your everyday life? What do you think of when you think of freedom or independence?
Sequoya: I think a lot of what you’re doing and what we’re doing creates that freedom and independence. When you have passive income—what they call mailbox money—you can be lying on a beach and still getting paid. That gives you the opportunity to do what you truly enjoy in life.
That’s the definition of independence and freedom: making your own decisions, doing what you enjoy, and pursuing your passions. Passive investments and alternative investments can give you that flexibility. I’m not saying it isn’t hard work or that there isn’t a lot of risk, but it is definitely worth it when you’re successful in that space.
Dustin: Sequoya, we appreciate you joining us. Thanks so much. This has been interesting. I don’t think we’ve had anyone on the show yet to talk about this space. We’ve been very real-estate-focused, and there are many parallels with real estate, but it’s interesting to hear about another way of investing and about the vehicle you’ve created so individual accredited investors can participate. More often than not, people think of private equity as a more institutional space.
If people want to connect with you or learn more, what’s the best way to do that?
Sequoya: They can reach out through Pass the Hat at passthehat.com, connect with me on LinkedIn, or visit Borgman Capital’s website for my contact information. I’d love to talk with anyone who is interested in the space or anyone who has a deal. We’d love to partner with people who have a deal as well, so reach out to us for either of those.
Dustin: We’ll make sure links to all of that are in the show notes. Thanks again for joining us. We appreciate it.
Sequoya: Thanks for having me. It was nice talking to you.
