Private Equity Demystified: How to Sell Your Business to the Right Buyer
On the Blueprint for Wealth Podcast, host Wayne Zell speaks with Sequoya Borgman, Founder and CEO of Borgman Capital, to clarify how private equity operates in the lower middle market. For business owners considering a sale, understanding how buyers evaluate cash flow, quantify risk, and structure acquisitions is critical to achieving a successful outcome.
Sequoya explains the fundamental mechanics of leveraged buyouts, the key factors that drive valuation multiples up or down, and why owner dependence remains the single largest risk for buyers. The conversation offers direct guidance on evaluating potential partners, navigating due diligence, and protecting a company's legacy during a ownership transition.
Listen to the full episode above or read the key insights from the conversation below.
Key Takeaways
Owner dependence is the single largest drag on valuation multiples
Buyers pay a premium for stability and predictability. In smaller companies generating around $2 million in EBITDA, the founder often handles sales, operations, and key customer relationships. If a buyer has to replace an owner-operator immediately after closing, or hire a high-salaried president to take over daily duties, that risk and expense lowers the multiple. Conversely, if a founder has already delegated responsibilities to a capable management team that has been in place for several years, buyers face significantly less risk and pay higher multiples.
Leveraged buyouts require proven, steady cash flow
Unlike venture capital or growth equity firms that chase rapid top-line expansion, traditional buyout investors rely on senior debt and mezzanine financing to fund acquisitions. Outside lenders require predictable, steady cash flows to service that debt through economic down cycles. Closely held, older-industry businesses—such as industrial manufacturing, distribution, food production, and equipment rentals—often make ideal acquisition targets because their underlying business models have proven resilient over decades.
Misaligned intentions and lack of trust kill deals faster than financial flaws
Most operational or financial issues discovered during due diligence can be addressed through negotiation or structural adjustments. However, personal misalignment and mistrust cannot be fixed. Out of approximately 1,500 opportunities reviewed each year, Borgman Capital acquires three or four. The primary deal killer is a lack of trust between buyer and seller, or a disagreement on the future vision for the business and its employees. When a founder's long-term goals do not align with the buyer's investment requirements, walking away is the healthiest option for both parties.
Deal structure aligns incentives and bridges valuation gaps
A business acquisition is rarely completed with a single cash payment at closing. Buyers use a combination of bank debt, seller notes, earnouts, and rollover equity to balance risk and achieve target returns. Requiring sellers to roll over a portion of their equity—typically around 20%—ensures that the founder remains financially invested in the company's post-close performance. Earnouts are similarly useful when bridging gaps between realistic historical performance and aggressive growth projections.
Questions Addressed in the Conversation
Why should a seller ever consider taking a lower purchase price from a buyer?
A seller should consider a lower offer if the highest bidder relies on excessive debt or aggressive cost-cutting to generate their returns. Overpaying for a company puts immense financial pressure on the management team and increases the risk of financial distress during an economic downturn. Choosing a buyer aligned with the company's culture and long-term health protects the business, its employees, and the founder's legacy far better than simply accepting the highest headline price.
How do private equity buyers determine the target return on an investment?
In the lower middle market, private equity firms typically underwrite acquisitions to achieve an internal rate of return (IRR) of 20 percent or higher. Lower middle market businesses carry higher operational risk than larger middle market companies, requiring a higher return threshold to justify the investment. Financial modeling incorporates variables such as capital expenditures, potential new leadership salaries, and required system upgrades to ensure these return targets remain achievable.
Can a business owner protect their employees and community commitments in a sales agreement?
Yes, specific protections can be written directly into purchase agreements, including commitments to retain staff, establish employee equity pools, or maintain management contracts. While legal agreements provide formal safeguards, choosing a buyer whose operational philosophy matches the seller's culture is equally important. Responsible buyers actively seek to maintain community traditions and support existing teams because stable, motivated employees are essential to sustained growth.
From the Conversation
“Once we trust each other, then that’s when a good transition happens.”
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This transcript has been edited for clarity and readability. Please refer to the original podcast recording for the complete conversation.
Introduction and Investor Base
Wayne Zell: Welcome to Blueprint for Wealth. Today with me is my special guest, Sequoya Borgman. Let's start at the beginning. Private equity raises money from investors. Sequoya, first of all, where does your investor money come from?
Sequoya Borgman: First of all, thanks for having me on the show. We can talk a little bit about our structure and how we raise money. There are thousands of private equity firms. I think everyone is a little different. We get lumped into kind of the same alternative investment pool, but everybody goes about it a little bit of a different way.
Our investor pool is primarily family offices, ultra-high-net-worth individuals—all accredited investors—and some smaller institutional investors. But we invest primarily in the lower middle market, so companies under $150 million or so in revenue, and really all over the country.
Wayne Zell: Is there any particular industry that you focus on, or is it just anyone who needs private equity investment?
Sequoya Borgman: We're kind of value investors, I'd say. We tend to invest in family businesses. We've bought 22 businesses since we launched almost 10 years ago. They tend to be closely held, older-industry types: industrial manufacturing, food businesses, distributors, and some equipment rental businesses. Recently, we bought two businesses really tied to infrastructure here in the country. Like I said, we've bought companies all over the country at this point.
What Borgman Capital Looks For in Investments
Wayne Zell: Is it fair to say that buyers are constantly looking for steady or regular cash flow? They're looking for clean financial records, and they're looking for a team that can run the business without the founder. When a company crosses your desk with a potential investment or purchase, what are the first things that come to your mind when you're looking at their proposal, and what attracts you to them?
Sequoya Borgman: We're really focused on the cash flow of that business and the seasonality and cyclicality in the business. We look at established businesses that have been around decades, that really have a proven business model that can maintain those ups and downs that come along with business.
That's because we're a traditional leveraged buyout shop. There are other firms that really focus on growth equity or more early venture-type investments, but we're traditional. We put leverage on every deal. To buy businesses with outside debt, you really need a strong, steady, cash-flowing business.
So that's the first thing we focus on when we see a new company. We look at how steady their cash flow has been, how they have managed down cycles in their industry or the overall economy, and what kind of cash flow we can rely on. Those are the businesses that we really focus on and go after.
Deal Killers and Evaluating Risk
Wayne Zell: There are downsides to these. What makes you walk away from a potential investment? What are the deal killers that you see first and most often?
Sequoya Borgman: Most things that pop up in diligence, we can work through. It's really the people parts of the business. At the end of the day, these businesses that we're invested in are all about the people, and that's still a huge part of the value in that business.
So if it's a person where there's a risk that they're going to walk away—and maybe you'll lose some customers or lose some revenue related to that—or you just don't get the warm and fuzzies, or you don't really trust the seller, that's the number one reason. Or maybe we're not aligned. Maybe they want something else for the future of that business than what we need as investors.
We look at about 1,500 businesses a year, and we buy three or four of them. There are a lot of buyers out there, and there are a lot of sellers out there. Not every deal is perfect for every buyer, and we make sure that we're aligned with what that founder or family wants to do with their legacy.
Understanding Valuation and EBITDA Multiples
Wayne Zell: Businesses can be valued in so many different ways. In my experience, buyers usually price a business based on a multiple of EBITDA: earnings before interest, taxes, depreciation, and amortization. It's simply a rough measure of operating profit. So if your EBITDA is $2 million and the multiple given to the business in this particular case is five, then it's a $10 million starting point. How would you describe what moves a multiple up and down today in this environment, in the past, and going forward? What are the key factors that you use in valuing businesses?
Sequoya Borgman: The biggest risk in a business is that transition from that owner-operator, especially those smaller, couple-million-dollar EBITDA businesses. Those owners are very involved in that business. If that transition doesn't go well, or they're not able to bring on a new president to take on some of those key roles, that's a big risk for the buyers. So we would tend to pay a lower multiple for that type of business.
Where if the individual has already stepped out of the business a little bit and hired a strong management team to take on some of those responsibilities, those companies tend to go for a higher multiple because, again, it's less risk for that buyer—especially if those individuals have been there a few years. It's not like they're bringing them on right before getting them ready to sell.
That's one of the biggest risks: these entrepreneurs have built something from nothing, but most of the time, they are a big chunk of that business. That has a much bigger impact on the multiple that you pay than people really think.
Wayne Zell: Is the multiple also impacted by the size of the company, the revenues, the number of employees, and how long they've been in business? How do you all come up with these multiples?
Sequoya Borgman: I wish it was more of a science, but it is an art. It's supply and demand. It's really how in demand that particular business is, especially if it's an add-on or maybe a strategic buyer that can get synergies out of that business, so they can pay a lot more than maybe a financial buyer like we are.
Sometimes it's certain industries. Right now, infrastructure-related businesses tend to be pretty hot, and service businesses are going for higher multiples. Historically, people are trying to go after investments that may not be impacted as much by AI, and that's really why service businesses are hot. But it goes in cycles.
From my standpoint, with that $2 million EBITDA business mentioned earlier, maybe one has a lot of capital expenditures every year. One needs a lot more investment. One needs a new ERP system. There are many different factors. So you can't rely solely on that $2 million cash flow. Or maybe you need to hire a high-level president to run it, and those people expect a higher salary than potentially whoever was running the business.
Really, the smaller the business, the higher the risk in that business and the more work it's going to take. If you buy a business with $10 million of EBITDA, they probably have a pretty strong management team, and they're pretty strategic. You can help them with big-picture stuff, but they don't need you telling them about day-to-day operations. Where a $2 million EBITDA business may need help with what's going on on a daily basis. That's all built into that multiple.
Sometimes it's just timing. Multiples can be down, and structure is definitely impacted when banks lend less leverage on these businesses. Either you have to pay less for the business, or you've got to put more earnout, seller notes, or some kind of structure in there to get the same return. Our investors still want strong returns, so you have to figure out how to achieve that through deal structure.
Typical Deal Structures and Financing
Wayne Zell: Rarely have I seen a deal where one check is handed over to the seller at closing and that's the end of the deal. There's cash at close, but there's also the possibility of a seller note, so there might be financing provided. There might be an earnout where you get paid if you hit certain targets in the future. And there's usually some type of escrow or holdback to protect the buyer from any breach of reps and warranties in the purchase agreement. What does a typical structure look like for you, or does it vary deal by deal?
Sequoya Borgman: It really does vary deal by deal. But a typical structure for us—say if we were paying seven times EBITDA for a business—we might put two to two-and-a-half times senior leverage from a bank on there, and then maybe one turn of either subordinate debt, mezzanine debt, or a seller note. All of that helps with the internal rate of return (IRR) on the equity we put in.
We are majority investors, so we'll put the equity in. If there's still risk around that seller, we'll have them either roll over equity, stay involved, or structure an earnout so that their interests and our interests are aligned. The less equity you put in a leveraged deal, the higher the return for us and our investors. If you paid all cash and all equity for one of these companies, you might as well put your money in CDs or some other less risky type of investment.
Wayne Zell: How much do you typically buy when acquiring a majority interest? Is there a range of percentage of ownership that you acquire, and do you require the seller to have rollover equity?
Sequoya Borgman: We're always majority investors, so we're always buying control. Probably 80% of the time, owners will roll over about 20%, but they can roll over more or less. We've bought plenty of businesses where we bought 100% and the owners rolled over nothing at close. It depends on what they want to do. As long as we can project the returns we need, we'll work around that.
Of course, if they walk away with 100% of the equity at close, we're probably paying a lower multiple for that business because we're taking on more risk. That's built into the price. Same with earnouts. If sellers show hockey-stick projections but aren't willing to stand behind those numbers with an earnout, that is very telling and factors into our valuation.
Wayne Zell: Most sellers working on smaller deals are unaware that these deals are financed by banks, mezzanine investors, and lenders. What percentage of a deal today is equity versus debt in your experience?
Sequoya Borgman: It depends on the business, how much debt it can take on, and the multiple you're paying. Some are 50-50. If you're paying six, seven, or eight times for the business, sometimes you're putting in a lot more equity. If you're paying a lower multiple—say four or five times—maybe it can only take one-and-a-half or two times leverage from a bank.
Banks don't really like financing smaller deals; it's a lot harder. Under the size we're doing, there is SBA lending, but we can't compete with that on the leverage we put on these businesses. Smaller businesses generally see less leverage from banks and require more equity, while larger ones attract more bank leverage.
Private Equity Myths vs. Reality
Wayne Zell: What is the biggest myth that you've heard about private equity? Private equity has a reputation: load the company up with debt, cut the staff, flip it. Some firms have earned that reputation; many haven't. What myth are you tired of, and how should an owner distinguish Borgman Capital from other firms? Why would they want Sequoya to come in as the investor?
Sequoya Borgman: Some of that bad reputation stems from the '80s and '90s when struggling businesses were bought, broken up, and stripped of costs, sometimes with 90% leverage. Those were the Michael Milken days, and a lot of deals didn't go well, which impacted people's jobs and livelihoods.
That was 40 years ago. I don't know any private equity firm today that doesn't want the company to be more successful after they buy it than before. These businesses are all about people. While there are turnaround shops that buy out of bankruptcy and have to make tough decisions, the majority of private equity firms buying healthy businesses want them to grow. You don't grow by cutting costs or cutting people—you do it by adding and growing.
Sure, deals are leveraged, so the bank gets paid first. If a business struggles, debt creates risk, especially if an economy turns right after an acquisition. Sellers also have to take responsibility: if a seller insists on overpricing a business beyond what it's worth, and a buyer overpays with too much debt, that creates a huge risk for the employees and the company.
Wayne Zell: Describe a situation where a seller should take a lower offer because it's better for the business.
Sequoya Borgman: In an auction process, you let the market speak. There are business owners with unrealistic valuation expectations. Most of those businesses just don't sell, or they figure out the true market value after a couple of years.
The main reasons to take less than the highest offer come down to alignment and legacy. Selling a business is a very emotional process. If a buyer overpays, they still have to achieve their required return. To do that, they may put immense pressure on the management team or aggressively cut costs.
Target Returns and Protecting Company Culture
Wayne Zell: What is the return you're looking for on an investment?
Sequoya Borgman: The lower middle market carries higher risk than the broader middle market, so we are always looking for a 20-plus-percent IRR on our investments.
I've never seen an investment thesis hit exact initial projections. It's hard to forecast one year out, let alone five or ten. But as a former CPA and numbers guy working alongside our finance team, we model out a 20-plus-percent IRR to justify taking on that risk.
Wayne Zell: Sellers often ask: Are my employees going to be okay? Are my customers going to be okay? Is my name still going to be on the building? A handshake about people is not a formal promise. How do you handle culture, management, and the founder's legacy before and after closing? What are you able to promise in writing?
Sequoya Borgman: We've bought businesses where the purchase agreement specified that we wouldn't lay off employees for a certain period, or where key employees received management agreements. In every company we buy, we set aside a portion of equity for the management team so that anyone creating value participates in the upside.
Regarding company names, we aren't going to step in and arbitrarily change a respected brand name. However, if a business hits a downturn, tough decisions have to be made to ensure the business thrives for generations.
We want to retain key employees, customers, and suppliers. For example, we bought a company nine years ago where the seller was providing high school scholarships in his local community. Nine years later, we are still funding those scholarships because we want our portfolio companies to remain pillars of their communities.
The Transaction Process and Founder Transitions
Wayne Zell: The process of selling a business involves initial conversations, indications of interest, letters of intent, rigorous due diligence, and final agreements. How long does it typically take from initial conversation to closing?
Sequoya Borgman: It takes longer than most people think. We've had deals take 60 days, and others that have taken years. It largely depends on the business and the sophistication of their advisors. Good advisors streamline the process; sellers trying to do it themselves take much longer.
Due diligence is rarely painless for sellers. Lower middle market founders often lack large internal finance teams, meaning they do heavy lifting personally. But buyers are handing over life-changing wealth and must be confident in their investment.
Wayne Zell: How does the founder's exit path usually play out? Are founders ready to step away immediately, or do you expect them to stay?
Sequoya Borgman: I rely on what the founder wants to do—you can't force an entrepreneur into a rigid box. Before closing, we discuss what a smooth transition looks like, whether that means staying on for a few months or two to three years.
Some founders choose to stay longer once they realize private equity isn't scary and that they have upside equity remaining. Having the founder continue running the business post-close helps avoid the typical "J-curve" dip in EBITDA that can occur when an entirely new management team is installed immediately.
Sourcing Deals and Regional Focus
Wayne Zell: How do deals come to Borgman Capital? Do you source them directly, or do they come through brokers?
Sequoya Borgman: We use multiple channels. We have five offices around the country and 15 team members sourcing through their networks. We work closely with brokers and investment bankers, and we perform outbound outreach.
Our best opportunities come from personal relationships in our regional markets that introduce us to great founders. Building trust over time leads to the best transitions.
Wayne Zell: Where are your primary target markets?
Sequoya Borgman: We focus on secondary markets and smaller communities. We have presence in Milwaukee, Minneapolis, Indianapolis, the West Coast, and Florida.
We've bought great companies in towns with populations as small as 350 people. These secondary markets often feature loyal employee bases, low turnover, and stable, multi-generational businesses with strong cash flows.
Wayne Zell: It has been a pleasure speaking with you, Sequoya. Thank you for being a guest on Blueprint for Wealth.
Sequoya Borgman: Thanks for having me on the show.
