Ep 489 Inside the Mind of an Acquirer: Sequoya Borgman on How Independent Sponsors Buy Companies, Structure Deals, and Spot Pretenders
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Hi there, and welcome back to another edition of Built to Sell Radio, the podcast designed to help you punch above your weight in a negotiation to sell your company. I'm the executive producer, Colin Morgan, and today we continue with our Inside the Mind of an Acquire series with Sequoia Borgman, who's the founder of Borgman Capital. Now, he's acquired 19 companies, sold two, operating as what's known as an independent sponsor, someone who raises capital deal by deal rather than through a committed fund.

If you're considering a sale, you'll want to understand how buyers like Borgman think. He breaks down how independent sponsors structure deals, the red flags that scare off investors, and why a $3 million EBITDA business run by a tired owner is often the perfect acquisition target. As always, links to Borgman's site and LinkedIn profile in the show notes at BuiltToSell.com. And without further ado, here is John and Sequoia. Enjoy. Enjoy.

Sequoia Bergman, welcome to The Cell Radio. Thanks for having me. Nice to be here. Yeah, it's great to have you. You've done 19 acquisitions. You've had two exits. So you're obviously a very active acquirer. And we've had the opportunity to talk to lots of different acquirers lately. And a couple of weeks ago, we

we talked to Rick and Royce who run the Harvard program on ETA acquisition, entrepreneurship through acquisition. They gave us a perspective on ETA. We had Jordan Dubin who came on and talked about, uh,

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. So we've sort of run the gamut, and they are literally some of our most popular episodes. So you've done this really in a very unique way. And so I wanted to kind of dig into your business model. Can you just describe to me kind of where you fit in that sort of –

kind of pantheon of or sort of landscape of acquirers? Like, what kind of acquirer are you? Yeah, we're kind of a hybrid model, as you alluded to. I mean, technically, the term used these days is independent sponsor. At one point, they were referred to as fundless sponsors. It's really where we raise the money to buy a company on a deal by deal basis. And as you had said, we launched in

And over that period, we've acquired 19 companies and we have two we're working on closing here shortly. So we'll be over the 20 acquisition hurdle here shortly. But with each one of those acquisitions, we line up the debt and the investors on a separate basis.

separate pool basis. First, a traditional private equity firm would raise a fund and go out and acquire, say, 10 to 12 companies through that fund lifecycle, usually about a 10-year lifecycle. Where we don't have a set lifecycle for each investment, we're more opportunistic, I would say, when it comes to finding nice companies to buy.

And what is the origin of the term independent sponsor? It's kind of one of those buzzwords I've heard before. I have no idea what it means. Independent sponsor. So what makes you independent and what makes you a sponsor? That's what I'm kind of trying to figure out. Well, I think all investors and especially all private equity investors are sponsors. They're sponsoring the acquisition of a company, right?

The independent comes from the fact that rather than, like I said, raising a fund through institutional investors, we raise the money to buy a company kind of on a company by company basis. No, no different than really an entrepreneur that's trying to buy a business would do that. If they didn't have the funding to acquire the business on their own, they'd go out to their network or to some investors and raise the money. And we've, we've,

done that over the last eight years. We have almost 500 LPs, investors, family offices, high net worth individuals, and accredited investors that have invested with us in those 19 plus acquisitions that we've done over that period.

Okay, so you've cultivated this group of buyers, high net worth individuals, family offices that you've sort of got on speed dial. And when you find a deal, you'll reach out to that community and say, hey, is anybody interested in doing this deal? I'm oversimplifying, I'm sure. But is that the basic business model? Basically, that's what it is. There's a lot of investors would love to invest in a lower middle market business. And there's not...

It's not as easy as investing in public stock market or investing in a fund. So our investors do appreciate having access to investing in a business because a lot of the net worth of individuals are built over owning equity in some type of entrepreneurial venture.

Yeah, for sure. And I get that. There's also, I've heard about, it's funny, over the weekend, I heard two examples of this. So I'm just getting up to speed. You may be very familiar with them. But there are these like websites that are trying to kind of do, it sounds like something similar to what you do in an offline world, in an online world. So they're aggregating information.

potential people who want to invest in

the purchase of a small business and if you've got some extra money or you're a family office or whatever, you can use this website to find a deal. Are you seeing increasing competition from sort of like online versions of what you're doing or is it really not an impact to your core business model? There's been a lot of websites and aggregators in the venture space, I would say, more startups, early stage businesses, and there's been a lot in the real estate space.

But for investing in lower middle market, cash flowing, established, nice businesses, family businesses or entrepreneur-led businesses, there's very few ways to get access to those. Now, a lot of the larger private equity firms, Blackstone, Carlyle, KTRs of the world are setting up these platforms for retail investors.

to get access and they're aggregating those primarily through RIAs, wealth managers, and that allows high net worth and accredited investors access to these types of investment opportunities. We actually recently launched a platform, a website called Pass the Hat within the last year. I think I saw about this. Yeah. Yeah. Very similar. So all of our deals, when we bring them to market, we list them on that website.

We've got a fund administrator that runs the software, the back office part of the accreditation part and the investor relations and reporting and all the back office part of the investment. But the front part, the platform past the hat is our proprietary platform. Interesting.

And as this becomes, I hate to use the overused term, democratized, I'd imagine the buying pool, the gene pool is getting pretty diluted. So, you know, in the early days, I think when you think of people who bought businesses, at least I thought of these very sophisticated private equity investors, etc.,

And now that these sites are democratizing, so for you can, I think, low investment, you start to buy little tranches of these small businesses. I can imagine everybody and their brother, the classic dentist who has a little extra money buying into these businesses through these platforms. Are you noticing the buyer pool get...

I'm saying diluted, but those are my words. You may not be so sore, but are you noticing they're not as sophisticated as they used to be? I think the traditional private equity investor has always been the large institutional investors, the pension plans, the large capital allocators. That's who traditionally got access to money.

to these types of investment opportunities, but it is coming down market. It's it's now, especially the smaller deals. Like you said, the traditional, very maybe wealthy or highly successful individual that, that may do very well, but doesn't necessarily have the access that an institutional type investor would have. But now, now they're, they're starting to get access to these types of,

of alternative investments. They've always had access to real estate and, like I said, venture, some of those more, say, higher risk type investments. But investing in nice, established, lower middle markets, just traditional businesses, cash flowing businesses,

for the most part, retail investors had very little access to those. Unless you knew somebody like myself or you knew somebody that was in private equity or you knew somebody that was raising a first time fund. Those are really the only opportunities you had to get access to those types of investments. But business owners, I mean, that's where they make most of their net worth is from the business that they own. So they like investing in other businesses. They kind of understand

the risks. They understand the market cycles. They understand the kind of the longer term illiquidity aspects of the investment. But they see that that's really where a lot of the net worth and equity in the country has been built is by owning assets

equity, owning shares in a privately held business. For sure. For sure. Yeah. And I think if I'm honest with myself, the popularity of our Inside the Mind of an Entrepreneur Acquire, excuse me, series is

It has been twofold. One, I think, you know, would-be sellers are interested in the other side of the negotiation table. How do they think? What do they do? But I agree to your point. On the other side, I think they also think, well, maybe I'll buy a business when I'm retired or maybe I'll buy a tuck-in acquisition that will help me kind of go to the next level. And so I think they're coming at these episodes wearing two different hats. So I appreciate that.

that distinction. Talk to me about a typical Borgman deal. So if, if you guys are going to invest in a, in a, in a business, you mentioned lower middle market. So kind of what size of business does that translate to in terms of EBITDA or revenue, whatever proxy you want to use? Yeah, there's all types of definitions for what the lower middle market is, but our focus is really,

Below the larger firms, the more competitive size companies. So all of our acquisitions have been under, say, $200 million of revenue, under $20 million of EBITDA, and really more in the kind of established business space, older industries, manufacturing, distribution, food, those types of industries.

Okay, that's a huge band under $20 million of EBITDA. Like to give you a sense of our listeners, you know, I think it's fair to say they would run the gamut of sort of three, four, five, $600,000 of EBITDA, maybe up to a couple or $3 million of EBITDA. That would be the, I would imagine...

The 80-20 rule would see 80% of our listeners in that window. So as we continue, that's the lens I'm coming at these, you know, a million dollars a day, but a million five who may be just a little south of the first tranche of traditional private equity, the kind of bigger firms that people have heard of, but they still, you know, want to

you know, have a good professional exit, but a good outcome. And so that's the space that I'm playing in. So you would, you would play in that space. Yeah, of course. I mean, those, those size businesses are great. I mean, you, you as a owner, I mean, I would love to own those, those size businesses personally, because I have really nice cashflow, um,

Usually you've got a really good niche. And buying them, there's usually quite a few competitors. So they're ripe for roll-up opportunities. They're ripe for consolidation.

They're right for integrations, merging with others in the space. I mean, that's a really good space to be in. And of the 19 deals that you've done, what proportion would fall into that south of 2 million of EBITDA space? Very few of them are lower than 2 million of EBITDA, I'd say. Yeah.

Most of those would be add-ons. So if we already have a platform that's, say, $3, $4, $5 million of EBITDA for the platform, it's perfect to do a $1 million EBITDA add-on or $1.5 million EBITDA add-on or $2 million EBITDA add-on. And again, I love those types of businesses, but usually when you're buying a business that's a million dollars of EBITDA,

EBITDA, if you're paying for the business, paying for some debt service on acquisition costs, you don't have the cash flow to pay a professional president to run that business or the previous owners. That's one of the concerns we run into. So it's much easier for an add-on where you already are paying for that professional president to run the overall organization. And you're looking at those $1 to $2 million EBITDA.

companies to really enhance that organization, add a territory, add a product line, add something that that business would take

Time to organically grow into. You mentioned the business south of that wouldn't necessarily underwrite the cost of parachuting in a professional CEO. What would you pay a professional CEO, not an owner, but a manager to come in and run a business with three, five million dollars of EBITDA?

Well, we like to incentivize our presidents and CEOs with equity. We usually set aside a chunk of the equity in an acquisition for that president and the management team. We like for really anybody that's creating value in the business to own part of the business. That's really key to us. And all these lower middle market businesses, it's all about the people. So the salary, the base salary is usually something reasonable, something that...

What's reasonable? Well, I mean, the smaller stuff, it's usually, I don't know, $200,000 to $300,000 maybe. And then the incentive comp is really tied to growing the cash flow, growing the value of that business. And then the equity is really tied to creating value for us and for our investors. If the individual is able to

create value for the investors above kind of the, the, the norm, normal returns, then they can earn or, um, get a large chunk of that equity for themselves. And that's where, where we really want individuals that are in it for the upside, the long-term upside that want to build something, want to be part of something pretty cool and want to really, um,

do something great for a business. So the CEO that you're looking for is someone who can create returns that are kind of better than the benchmark. What benchmark do you use to consider the kind of average? Are you using like the economy is growing at 3%, 4% a year, so you got to do better than that? Or is it the industry that they're in? How would you quantify the benchmark?

It's really, I mean, at the end of the day, my fiduciary responsibility is to our investors. So, I mean, it's really the investor hurdle that we're trying to get over, not necessarily the company's growth, because you're right, the economy traditionally before COVID would grow at two, two and a half, three percent a year. And every company can't grow more than that or it doesn't keep in line where to get a 20 percent return on that return.

on a company growing that size, you can either increase margins, increase EBITDA, grow the top line, or really use leverage. I mean, that's traditionally private equity and most buyers, a lot of the return is based on using that leveraged buyout model where you use some leverage

some bank debt for part of the acquisition price, you pay that down, that turns into equity and it really gooses your returns. No different than buying stock on a margin account. That's kind of the simplest way to explain it. If the stock does well and you're using a margin account, your returns exceed what that stock return is.

You threw at 20%. And would that be a typical per annum expectation of an investor in a deal that you cook up? Would that be reasonable, like that they would be looking for 20%? Yeah, that would be very, very reasonable for, I mean, returns have come down a little bit over the last decade. Just it's a lot more competitive for buyers. Multiples are up. Interest rates are up. But so it puts a little bit of pressure on, on, um,

on returns, but I would say to do, um, kind of a, uh, acquisition, you would want high, high teens, low 20% returns to make it worth, worth the while, just given you're tying up your, your equity for a longer period of time. And it's a higher risk investment than, um, than say investing in, in, in T-bills or some type of lower risk, um, um, opportunity. Yeah.

So are you at Borgman, as you shop these deals to acquirers, to investors, family offices, wealthy individuals, et cetera, are you doing the model to say, hey, if you kick in a million bucks and we hit these milestones over the next five years in this business, that million bucks you're giving me should be two, two and a half, you know,

five years on. Are you building that model for them to see or are they doing it themselves on their own sort of spreadsheet? We do the models. I mean, it's typical leveraged buyout type models and we'll do a base case, upside case and kind of a low side case. Yeah.

But I've never seen a model over a five or 10 year hold period. That's exactly the same as what you think going into investment is as any business owner out there knows it's, it's not a straight, uh, easy, uh, easy line, but we'll, we'll use our best, best case scenario. We'll do all the research, all the diligence, and we'll put together a kind of a expected model. And, and if it meets our, um,

um, investment hurdle minimums, then that's when we'll move forward. And again, me and my partners invest in every deal ourselves. Um, and then the, on the more exits we do, the more we roll into the next one. I mean, I've, I'm the largest investor in some of the deals we did last year because we had a liquidity event right before those, those, um,

were acquired. And that's kind of our model. So we're only buying companies that we really strongly have a like ourselves. Got it. So let's walk through a typical deal, obviously anonymized. But let's imagine it's a business in a traditional industry. It's a carpet cleaning, commercial carpet cleaning business in the Southeast. They have $20 million in revenue and

let's say they've got $3 million of EBITDA. How would you structure that deal? Like, what would that look like? What's the cap table look like? How much is debt? How much is equity? Who's kicking in the money? That kind of stuff. Yeah. I mean, that size deal...

I mean, we caught the ACG has a GF data analysis of kind of the average. You just threw out some acronyms. Nobody's going to know ASG and EF. What were the two acronyms you just said? ACG. I'm just saying we so we look up the multiples for the industry. So we'd look up the multiple and it's probably something that size is probably in the four to seven time range. So say we're paying somewhere in the middle, let's say six times. So we're paying five.

For a $3 million EBITDA business, $18 million. Right now, debt has the leverage you can put on businesses come down a little bit. So maybe we put three times senior leverage. So that's about $9 million, so about half of that. So just before you go on, senior leverage means it's a bank debt that in the event of

things go badly, that's what gets paid back first. Yeah, the banks, I've sat on board a bank and banks always get paid first. The equity holders get paid last in these transactions. So yeah, so somewhere around there, two and a half to three times, three would probably be a little strong for that size company, but say two to three times a bank would loan you. So six to nine million,

Sometimes we would put either another turn or half a turn of subordinate debt or mezzanine debt. That's kind of- Okay, a turn, just define that for folks who may not be familiar with that expression. That would be one more times whatever the EBITDA is. So $3 million. Yeah, one and a half to $3 million would be kind of a higher risk, a higher rate debt, either from a-

a MES fund, a subordinated debt fund, or sometimes it's a seller note. So it could be from the seller. The seller would be providing the financing for that second turn.

And that's more common these days, just given where the banks are and interest rates, where the interest rates are. And from a buyer standpoint, that's more favorable to have a seller in there versus a higher rate debt fund.

And then the rest would usually be either equity or sometimes if there's a customer concentration for that carpet clean business, maybe they have one really large customer, maybe you have some of that is an earn out or something tied to that risk in that business.

And that would be the normal kind of funds flow cap table would be made up of maybe 50% debt, 50% equity. And then there'd be some transaction costs in there. Of course, all the attorneys and accountants and anybody doing anything.

Outside due diligence and the banks would charge some fees to get that done as well. Okay. And the equity in this case, so let me just summarize for my listeners, maybe on a jog or doing the laundry or whatever. So it's $18 million market price. Again, this is just a hypothetical example, but three million of EBITDA times a six multiple gets you to $18 million purchase price.

Two to three million of that, two to three times the earnings, in this case, nine million, I've written down a senior debt. That would be the bank. And then there'd be like a mezzanine debt or a subordinated debt, which means behind

or below the senior debt of say 3 million, that could come from a mezzanine debt financer or the seller in this case. So now we're up to 12 million. We're still 6 million short. The 6 million short is equity. And so that would be what you raise, either you, your partners personally kick into a deal or

Or you would shop that to potential other partners who might want to participate in that deal. Is that right? Yeah, that's correct. That would be a typical structure. Okay. Okay.

Got it. Excellent. And we may put a little bit more equity in just like I said, to cover the closing costs, the transaction costs. And then a lot of times we'll close the business with some cash on the balance sheet. So we'll most businesses you buy are debt free, cash free. So maybe we'll put another five hundred thousand or a million into the business to so that day one they'll have cash for operational purposes.

Okay. And let's just say for round numbers, again, forgive my ignorance on this stuff, but let's just say somebody comes along and says, I'm going to write the $6 million check for all the equity, right? So I'm going to give you $6 million for all the equity, and we'll do the seller's note at $3 million, and we'll do the senior debt at $9 million. So you've got $18 million, six in equity. Okay.

If I write that check for $6 million, I own 100% of the equity at that point, correct? That's correct, yeah. Okay. Okay. So if all goes well and this thing goes great and 10 years down the road, the business has doubled, it's now $6 million EBITDA and the debt's been paid off.

Now I've got a business that's got $6 million view to maybe I've got now I'm maybe I'm worth seven times because I'm bigger. Now I've got seven times three is 21 million. And now I've turned my my $6 million original investment into $21 million. Is that the kind of basic business model over a 10 year whole period?

Well, I think over that, the one difference is, yeah, if you grow your EBITDA to 6 million and you're selling for seven times, you're really worth 42 million. So that's $6 million that you put in. Forgive me, I'm doing the math wrong. But after 10 years, your debt should be paid off. You've really grown a nice business. So your $6 million that you invested over a 10-year hold period is then worth $42 million. So that's a huge return on...

For investment. Yeah, I'd love that business. Let's go find that. Let's go find that business. Yeah, me too. I'm like, I'm in. Where do I get that business? Okay. So that's all to the good if it all goes swimmingly well.

I'm assuming there are instances where it does not go well. I read your 2024 newsletter, which was great, by the way. I think you said it to your investors and people in your network and so forth. And I think by and large, it was a great year in 2024. But there was, I think you said something to the effect of we learned everything.

Warren Buffett's golden rule once this year of the 19 deals. One didn't go so well. I can't remember Warren Buffett's rule, but it's like rule number one, never lose money. Rule number two, refer back to rule number one or something. Am I getting basic? Yeah, never lose principal. He's a smart guy. Never lose principal.

Yeah. So are you willing to share the one that didn't go so well? Again, anonymize if we need to. What went wrong? Because on paper, for a listener, they might be going, this is like a license to print money. This sounds like it's easy. No, it's not easy at all. I always say, I call them my problem childs because when you buy 19 companies, there's always one business that's

that's going through some type of cycle. They never are all firing on all cylinders at the same time. And it seems like they're all different. One that we had some issues with, say, four years ago is now our best performing investment. It just as business owners, anytime you own a small business, and I said earlier, it's not a straight line straight up every year, and especially the last four years with

the challenges of COVID and everything that came along with that. And now kind of uncertainty in the economy, there's always some challenges. And we had a business last year, we actually invested in it about six years ago, that was really focused on the telecom space. And there was a slowdown in the telecom sector.

Last year, it's just the management team, us, everybody's working so hard to get through those downturns. And sometimes it's really outside of your control, the overall control.

economy or the sector that you're in or the customer is having challenges or with interest rates going up there's stuff that's just beyond what you can handle as a business owner and that's one of the one of the stressful situations we were in last year we were just had a business really really tied to the telecom sector when when telecom was having a downturn which do you

We sold the business really quickly.

but it wasn't, it wasn't a great investment. They're not all home runs. Like I said, that, that, that model, that, uh, carpet clean one you, you talked about, that would be a great, great investment. Um, where the ones we sold, the two we sold the year before, those were both kind of home runs, uh, for us. So, um, it's, uh, it's, it's not easy. I tell everybody, everybody wants to get into buying businesses, but once you buy them, especially when you have a, uh,

outside banks and and financers and others that are ahead of you in the cap stack it is a lot of stress anytime you're you have business cycles it's it's a lot of work and you just put your head down do the right thing stick to business fundamentals and most time you get through it

Now, I've never borrowed money, so I don't know. I've heard this term covenants before, but I don't know really what... I mean, I kind of know on paper, business school, what covenants means. But I'd be curious to know...

Maybe get a layman's description of what you've seen in terms of market covenants, what's typical when you're borrowing that kind of money. So let's go back to our commercial cleaning company, $3 million of EBITDA. You buy it for $18, $9 million of senior debt. I'm imagining that. So let's start with like, what are the conditions that that lender, that bank is lending you that money? First of all, is there a personal guarantee of any sort?

No, usually there's not. When we're syndicating to other investors, it's really hard to do a personal guarantee. And so would there be any recourse that the bank would have to the other 18 companies in your portfolio? You bought 19 businesses. If deal number one goes sour and there's debt that needs to be repaid, could they go after deal number two or three or four or the other companies?

Do you know what I'm asking? Yeah. No, they all stand alone. I mean, really, the banks that we work with are all cash flow lenders. So they're lending based on the metrics and the credit of that particular business. And that's where their collateral is. And that's what the covenants are tied to. Okay. So that brings me to covenants. What do you mean by a covenant? Can you give me an example of what a covenant would be?

Well, usually they're tied to either desk service or leverage. So in that situation, say it was $3 million EBITDA business and you put $9 million of senior or bank funds.

leverage on the business. Maybe they have a covenant that your, your EBITDA cannot go below $3 million or else you're outside of competence and, and yeah,

Which is not a great thing. Okay. So it's kind of like the old, you know, the bank gives you the umbrella when it's sunny and asks for it back when it's raining. So if – obviously, you wouldn't borrow that kind of money if you thought the EBITDA was going to go down. But if you did have a situation where EBITDA would go down –

Like the last thing you need at that point is your bank breathing down your neck saying the EBIT is down. Like, what am I supposed to do? You already know the EBIT is down. So like, I guess I get what am I asking? I'm asking like in that situation, no guff, the EBIT is down, which is why you're calling. If I knew how to get it up, I would get it up. I can't because of these six factors, the economy, tariffs, whatever. Like that just creates...

a difficult situation for the owner and the CEO, because obviously if they knew how to get EBIT up, it's not like they're trying to lose money. What do you, how do you coach someone through that? If the bank is calling and saying you're off, you're what's, what do they say outside of your covenants? Is that, is that the kind of lingo? Yeah. I mean, you actually, the way I look at it is more from the bank standpoint. Like, like I said, I sat on the board of a public bank until recently and,

And really, from a bank standpoint, is their cash and what they're lending you is kind of like your inventory when you have a business. And when that value of that inventory goes down, you're already out that cash. So you might as well just liquidate that inventory or sell it for whatever you can get.

even if it's at a loss because it's not helping you on that balance sheet. It's taking up working capital, it's taking up resources and time and effort that you could be spending elsewhere on your business. And that's where a bank situation is. Once you're outside of covenants, once they have to take an impairment and a write-off,

of the value of that loan on their books and it hits their financial statements, they wanna do everything they can to just get out of that situation. They don't wanna spend time and effort and tie up the capital of the bank

on that loan. - Are you saying that they would actively encourage the sale or bankruptcy of the company in that situation if they're outside covenants? - Yeah, I mean, that's usually what the bank would wanna do. They'd wanna sell the business or liquidate the business. - Wouldn't they be selling it at a deep discount? Like, I mean, let's use the commercial cleaning company. Let's say it has $3 million of EBITDA, you buy it for 18, things are great.

The bottom falls out of the commercial cleaning market for some reason. And it goes from $3 million to $1 million. Still a profitable company. Still a profitable company. The former founder would have been thrilled to have a business generate a million dollars EBITDA. But the bank says, no, no, you're outside your covenants.

What happens next? Because you sell a million dollar EBITDA company that's gone from three. What are you going to get? A couple of times EBITDA for that? Like it's pretty, pretty...

that loan is probably worth $3 million now is three times the one. So they've already taken a $6 million bad debt charge off on their books that ran through their financial statements. They had impacted their shareholders in that quarter that it happened. So from the bank standpoint, in a subsequent quarter, anything over $3 million that they can get is a plus. So if they could sell that business for $3.5 million, that's

they would get an actual half a million dollar positive hit to their income statement. Oh, that's interesting. In that quarter. Because they would be required to take that impairment. As soon as they knew the business had gone to a million dollars. As soon as the covenants are violated, they're required to... I mean, banking is a highly regulated industry. They don't have leeway to not impair those assets. So as soon as that quarter that that's impaired...

They've already taken that loss. Isn't that interesting? I had no idea. Okay, so they've taken the loss. So they're highly motivated to recover something for that because they've basically written it down. Yeah, if they did anything above what they wrote it down to, that's a plus. Okay, so from your perspective, if you're the owner, if Borgman has invested in a company like that, you're trying to hold off the banks and say, no, give us another couple of months. We've got to...

like a runway here to sort of fix the problem because you don't want to sell at that rate. So I'm assuming you would be trying to negotiate with the bank at that point. Yeah, you would. Give us some time. And the bank wants to work with you too. I mean, they're not evil institutions and private equity is not

I know they get a bad rep. We're not out there to like over leverage businesses. We want nothing more than the business to be successful. But yeah, cycles happen. Bad things do happen. And when that happens, you've just got to be open and honest with the bank. And whatever type of projections you give the bank or the plan you have to get things back on track, you just have to meet those. That's when the banks get...

concerned is if things continue to deteriorate or they don't see a short-term turnaround in the market. Like I said, they're doing what's the best for their investors and for their employees and for their business. No different than a business owner would be doing for their business. If you had a... Understood. But to go back to our silly hypothetical example, we've got this

Business generating $3 million of EBITDA. It sells for $18 million, nine of which is covered by senior debt. So they got a loan for $9 million. $3 million was seller financing. So one turn...

of EBITDA, in this case, $3 million, that seller of that beautiful carpet cleaning business that he or she built over 36 years, blah, blah, blah, that is at risk, that $3 million behind the bank. So if the bank forecloses on the loan, it's like, you guys are out of luck. You're down to a million. Get whatever you can get for it. But I want to close the next 60 days, whatever. They're effectively washed out of that.

that $3 million of seller financing, they're going to lose that money. Unless something spectacular or unusual happens, they're going to lose that equity they rolled, I'm assuming. Yeah. Because they're sitting behind the bank. Yeah, they're subordinated bank. A lot of times, though, the bank will reach out to that former owner. I mean, the former owner is still, even though they rolled, they have $3 million still tied up. They walked away with $15 million in

So either they can buy the business back or step back in. Usually the former owner knows the business, knows how to run the business better than any professional president. So I have seen that quite a few times over my career is where either a former owner will buy it back from the bank or put some more equity in to keep it. Pennies on the dollar. Yeah. I mean, they know that business. Yeah. Yeah. So, hey, you want to sell it back to me for three and a half, like,

Sure, I'll do that. And they know exactly where all the bodies are buried and they can figure out how to right the ship and get it back to $3 million and sell it again, I guess. That's the play. Because I've heard, it's funny, on this show, we've heard of people buying back their business. And I've always been curious as like how that works exactly. You buy business that you sold for pennies on the dollar. Well, you're describing the playbook that I'm assuming happens. And if I were a bank, I'd probably do the same thing. Like I'd go to the guy we bought it from who knows how to run it.

Yeah, that means that whoever the original buyer was didn't do a very good job, either over leveraged, overpaid, or just tried something that wasn't in the best interest of that business. Yeah, yeah, yeah. Which brings me, when you buy a business, what's your...

I guess when we had Adam Coffey, who wrote the books on private equity, I can't remember all of them. Playbook was one of them, and there's two or three others. He talked about the ways that private equity groups will traditionally make money. One was on...

you know, quote, professionalizing the business, bringing some, in his case, there's kind of GE Grotonville sort of management rigor to a business that maybe lacked that. The second was on synergy. So, Hey, if we're going to bolt three businesses together, we probably don't need three bookkeepers. We'll get rid of the two and both keep one. So kind of synergies and then three multiple expansions. So, um,

uh, you know, bigger businesses sell for better multiple. So if we were successful at building this business up and tripling its size, then it should get a better multiple. How do you think about, first of all, do you agree with Adam that those are the three ways that most PE companies are kind of three big levers? Is there a fourth? And if so, kind of which of the three do you kind of rely on most heavily? Yeah, I think those are the, the three that, uh,

that come out of the playbook the most. To some extent, those are all financial engineering, though professionalizing the business really means making it more attractive to a larger buyer, somebody that doesn't want to go through rolling up their sleeves and doing all the hard work that it takes to get systems in place, get processes in place, get a professional management team in place, do all the things that

a larger, more sophisticated buyer doesn't have the time or doesn't have the resources or doesn't want to take the effort to do. And that does add value to a business. I mean, the synergies, sure, there's a lot of synergies when you're doing a roll-up, but there's also a lot of costs. I mean, those systems that I just mentioned, those processes,

Those procedures and documentation and those management teams, I mean, there's a cost to add those to the business. So I don't always count on the synergies. They're more of a nice to have.

And then the multiple expansion, I mean, for the previous decade, that has been one of the largest ways that private equity and investors have made nice returns. If you can pay a six and sell for seven and whoever's buying it for seven can sell for an eight. I mean, you can make money in a shorter period of time. I think that you can't count on that these days, though. Multiples have come down or they've kind of stabilized significantly.

You really have to create value either by growing margins, growing the top line or growing EBITDA and professionalizing the business at the same time. I think the multiple expansion is not something that most people are modeling out right now. And also with multiples coming down and leverage coming down,

You can't get as much of a return from the financing side of the business either. When you at Borman buy a business, are you trying to get the owner to roll some equity and kind of reinvest with you, continue to run the business? Is that sort of part of the playbook? It is. I mean, you want the...

Former owner to have some skin in the game. Like I said earlier, usually that owner's run that business for 30, 40 years. They know it inside and out. There's nobody that knows that business better. And us or any professional president that we bring in to run that business, it takes a couple of years to kind of get all the ins and outs and nuances of that business understood, the culture understood.

And to have that owner still there helping you and highly incentivized to make sure that business continues to be a success is key. I'd say probably 80% of our businesses, the owners roll over, usually around 20% or so. How do you keep them motivated? Because part of me thinks...

Let's just use our hypothetical example. You write a check to an owner for the sale price of $18 million, but if you get them to roll 20% of the equity, that's $4 million. So now they've got a check for $14 million. Now, is $4 million a lot of the money they've rolled? Is that a lot of money? Yeah, absolutely. It's a lot of money.

But so is 14. And if they're sort of in the twilight of their career, if they're 60 and their spouse is saying, hey, let's travel and let's do this and let's do that. I mean, how do you...

First of all, can you keep them as motivated as they were when they were literally trying to make payroll? And how do you do that when their basic Maslow's hierarchy of needs, the first three or four rungs are permanently solved for at 14 million, which is the kind of money they got out in the first tranche.

Yeah, it's tough. I always say it's if you have an employee that hits the lottery, what's the what's the odds that they're going to come into work the next day and be just as motivated? Most most of them are going to hand in their their resignation and you'll never see them again. So one of the questions I like to ask in when I'm meeting with an owner.

And it's all about trust. I mean, you want to buy a business from somebody who really cares about his company, cares about his legacy, cares about all the employees, cares about, you know,

really what they built over a lot. If it's somebody that really just cares about the money and they're going to sell off in the sunset, that's usually not a business that you want to buy. There's just too much risk. I know you've got kind of a value builder game book that you go after, but that's one of the biggest risks we have as an investor is buying a business and transitioning that to a new

leader, a new president, a new CEO. So if we don't feel very, very comfortable that that owner has

our best interest in mind has a business's best interest in mind will help with that transition because it does not always go smoothly. Then it's usually a business we're not going to invest in. So that's, that's kind of one of our key. And then I always ask the, the, the owner what they're going to do with their, their money. Like if they're going to buy a, a Island down the Caribbean and be gone, then you, you, you're not, they're not going to be there helping you get over the, the kind of the, the,

The hurdles, especially in the first year, first year or two, when the company is highly leveraged before you start paying down the debt very much. I mean, that's when the biggest risk that the initial transition and that initial kind of leverage are the two risks that we have and kind of the leverage buyout world. And and you want an owner that wants to help you through that period.

So what do you want to hear? Because every owner who sells eventually, some buyer is going to put their arm around the figuratively shoulder of the buyer owners of the seller and say, like, why do you want to sell this thing? It's this commercial cleaning company, carpet cleaning company. You do $3 million of EBITDA. If you just hang on to it for the next 10 years, I mean, you're just basically cashing all those checks. Why on earth would you want to sell this thing?

What do you what like what's the good answer to that question? Like what's music to your ears when you hear them say I want to do X, Y and Z? And what's like I want to run 10 miles faster the other way when they say X, Y and Z? Like what's a good answer to that question? What's bad?

I think the best answer to that question is the truth. I mean, you can tell when somebody's telling you the truth or telling you what somebody coached them to say or what you want to hear. If somebody tells you the truth of why they want to sell their business, why they want to transition, together before close, you can work on a game plan that will help mitigate that risk and will help

Make sure that the transition goes the way the owner wants to go, because if we try and go in there and force something down their throats or the management team's throat, that doesn't usually work very well. So, I mean, I just want whoever's selling the business to tell me the truth, and then we'll work together on a plan that will mitigate that.

the risk to us. But what if the truth is like, I'm afraid AI is going to put this business out of business. I'm like tired. I'm exhausted. My employees are all driving me crazy. What if that's the truth? Yeah, that might be a harder business to sell. I mean, that might scare a lot of people off. It would scare you guys off. But it's the truth. I mean, being the leader of a small business is probably one of the most loneliest, the hardest things

roles there is out there. I know a lot of people, they want to be a president or CEO or business owner, but they have no idea of how hard and stressful and lonely that position is because you really can't share a lot of your concerns with your coworkers and your employees because it would freak them out a lot of times.

Okay, let's role play. What if I said, you asked the question like, hey, John, why do you want to sell this thing? $3 million to you. But I mean, this thing's like a license to print money. And I say, Sequoia, I'm just tired. Like, I'm just at a point where I'm tired. And I've been doing this for 27 years and I'm tired. What are you hearing when I say I'm tired? What's going through your mind?

That's great. I mean, we can address that. We can hire somebody that has a lot of energy and is motivated to help get that business to the next level. I love those businesses that are tired of $3 million of EBITDA. Maybe they've got to pay some taxes and pay some other stuff, but they're pulling out a million and a half, $2 million a year, living a really nice lifestyle.

probably very low debt. Those are great businesses. I mean, they don't really have any motivation to grow that business because if you grow it, it takes more work, it takes more of your time, and there's more risk. You got to leave more money in the business or reinvest more money. So they get those businesses to a nice lifestyle stage and they're living a really good life. Those are great businesses to invest in.

How would you convince me to sell it to you? Again, if I was to say, but Sequoia, like I'm pulling out a million and a half every year. I'm working 30 hours a week. I got the boat and I do travel and I run it all through the company. I mean, like I'm not going to sell for five times. Are you kidding me? How would you respond to that sort of reaction? Like what would you say to someone like that?

I mean, I can't argue with that. I mean, if I was in that situation, I'd be in the if they're really working 30 hours. My suspicion, though, is most business owners, when they tell me they're barely involved in the business or they're working 20 or 30 hours a week, that's that's not the situation.

I know I've got a lot of, a lot of businesses that are responsible too. I mean, you're pretty much on call 24 hours a day. Uh, if you're on vacation, you're, you're dealing with issues, all the issues that drives to your level, even if it's 30 hours a week is all the issues that nobody else at the company could, could resolve or, um,

It's the stuff that nobody wants to deal with. That's what a business owner is dealing with day in, day out. I mean, I know personally those stresses and some people just they'd rather have a

nice lump of cash that they can live on the rest of their life very comfortably and not have that headache of having to deal with the day-to-day stresses of owning and running a business. And all the people, their livelihood and their health is they're really relying on you to do the right things for them. That's a lot of stress for somebody. How would you respond if somebody said...

Like, I appreciate you want me to rule equity, but I'm just not a – I'm not a play nice in the sandbox kind of guy. Like, I'm happy to run this thing. I'll run it independently. But if you want to buy it, you buy it. But I'm not going to stick around for some five, seven-year transition period. That's not me. I'm an independent – I'm a lone wolf, whatever, you know –

they use, how would you respond to someone like that? I love it. Cause that, that is 99% entrepreneurs. I mean, there are entrepreneurs cause they don't want to report to somebody. They don't want to work for somebody else. That's why they're, they're an entrepreneur. That's why they took the risk in the first place and started their own thing is because they want to be the decision maker. So I know that's, that's the case when I'm buying a company and that's why there's usually a transition period. Um, and when, when the former owner is still running it, um,

We don't micromanage them. We don't tell them what to do. Like I said, they know how to run that business. We're just happy that they let us invest. And when they're ready to transition out and help us bring in somebody under them to kind of mentor and step into that position, then we'll address that at that time. But we don't force a game plan on an entrepreneur because we know that

that's the easiest way for them to just throw, throw in their hat and walk away. Cause, cause they've already got a big chunk of the money, even if they're still tied up with some incentives and some rollover and earn out and all that kind of stuff. Even, even the large half the money that they, we paid them is enough to usually live on for rest of their lives. Yeah. Yeah. What's the difference in your experience between a professional CEO and a founder?

The difference a professional CEO is usually they've come up through a great management training program. They know how businesses are run. They know a lot of different resources to bring in. They know KPIs and they know all the management skills.

styles and really how to run a business. Where a founder, an entrepreneur, in my experience, they're usually great, really, really, really good at one thing, that they're a great engineer or product person, or they're a great salesperson, or they're great at

maybe one or two aspects of the business where a professional manager, they're usually, they're not as deep in any one of those areas.

They tend to build a team under them. They bring in higher level finance resources, higher level sales resources, higher level operations resources. And they're more of the motivator, leader, strategy level person. Where most entrepreneurs, they're very, very good at something that made that company great. And that's usually a difference. Yeah, I asked that question of...

Rick and Royce, who lead the ETA program, Entrepreneurship Through Acquisition, at the Harvard Business School. And they were talking about the difference between the kind of ETA program

So the MBA, get their MBA and go off and try to buy a business and the founder they're buying it from. And we had a hearty debate, I think is the right choice of words around who is better to lead that business. I imagine the ETA buyer, in particular, the sponsored search type buyer,

competing with you guys at Borman for deals, right? Like, are you running into a lot of noise in the marketplace through the ETA model? I would say they, I'm a big fan of the model. I meet with a lot of the search funds and, and, you know,

people coming out of the MBA programs going after that. I mean, I wish I was aware of that at that stage in my career. If I knew 20 some years ago, 25, 30 years ago that I could do that, that would have been a great launching pad. It just wasn't a thing back then. So we see a lot of deals, a lot of stuff that's maybe too small for us or isn't a great fit, but would be perfect for a search fund. So we'll share those with them.

with people that are in that space and vice versa. They may run across something that's much larger than they can do through their model or not a good fit for them. And we can either partner or they can introduce us to those opportunities. So I don't see that. And my peers too, they're doing the same thing. I mean, there's so many, there's, I don't know, 4,500 PE firms. There's another...

1,400, 1,500 independent sponsors out there. There's a lot of people trying to buy companies. So every business owner probably gets a couple calls a day or a week about their business. And the search fund guys, they're even better at doing the cold outreach, I'd say, than the more established firms are.

They're very motivated. They usually have a one year or two year window to get it done or else they've got to go get a real job and start out at some company. So they're highly, highly motivated to work their network and to make the calls and do the emails to drum up some nice opportunities. Yeah. And you raise an issue that I wanted to address head on because I think our listeners, by and large, are inundated with...

you know, people posing as business buyers. And I use the word posing intentionally because I think there are a lot of charlatans, a lot of people that are, you know, trying to lock business up, business owners up under an LOI, then frantically trying to raise money, never done it before, stretch out due diligence by a year because they don't know what they're doing. And the business owner gets screwed in the process because they are, they have sort of

fallen victim to someone who has no business buying a company. How do you differentiate yourself when you approach a business owner? How would they know, like, how do they know you're legit versus the 50 other calls they get from 25-year-old MBAs who, frankly, haven't a clue?

Yeah, no, we see it all the time. And we've actually bought three or four businesses where an owner did get tied up with somebody that gets them under LOI and just cannot...

they can't get the deal financed. They can't get the equity or they, they, the terms are just too good that nobody's going to invest in a, in a company under those terms, or nobody's going to finance a company under those terms. And then the individual has to go back to the owner and try and renegotiate. And that, that never works. So I'm always just upfront and honest on what I think the value of that business is. And I know what we can get done, um,

I mean, we've we've we've at this point we've done 19. So we've kind of kind of done something right from that standpoint. A lot of times I like to be not the first person to talk to a business owner because maybe they've talked to their friend at the country club who sold their business for 20 times, whatever number. And that's their expectation. But once they talk to three or four legitimate buyers or they have a great reputation,

investment banker or broker or attorney or great advisor to really tell him what the real market is. And that's why I said that GF data, that's what we rely on quite a bit for the multiple values. That's what businesses are going for. And yeah, there's a lot of people that are out there calling them. The search fund guys are usually going after the smaller companies.

businesses. And there's, I mean, there's a lot of incentives out there for SBA will help finance businesses under $5 million of purchase price. I mean, those are great buyers. Get a young, hungry, motivated MBA in there. I mean, most of these business owners, they were

in their 20s when they started their business. That's why they've grown such a nice business. It takes, it doesn't happen overnight. It doesn't happen in two or five years. It takes a long time. Yeah, but what are the subtle cues

Or maybe less subtle that you use to differentiate yourself from the noise. Like I've looked at Borgman Capital. You've got a professional website. You've got the newsletter, which looks professionally done and serious, got some gravitas. People can go to your LinkedIn profile and they'll see like somebody looks legit. Like what else do you do in an initial conversation, initial outreach session?

That just, okay, this guy knows what he's talking about. Like, how do you have, again, the reason I'm asking this question is I want my listeners to have a three point checklist to legitimize outreach to be able to say, yep, I should take that call or nope, they have no clue what they're talking about. Like, what do you do that makes it clear you're legit?

I think the number one thing is most of our outreach and most of the business owners we talk to, it's a warm introduction. It's through one of their trusted advisors or it's through one of our investors that have invested with us that will introduce us. We're not doing cold spam calls.

calls to business owners. And I do, I have plenty of friends that own businesses and they'll, they'll call me and they say, what do you think of this group? They reached out to me. Is this legitimate?

or there's people doing a roll up in this space. What do you think of this firm? And it is a small, even though there's a lot of firms out there, it is a small deal community. We all talk to each other. We all use similar invite M and a advisors. Um, it's pretty easy, at least from my standpoint to find out if somebody is legitimate, uh,

So I would avoid a lot of that cold, spammy email stuff. And now with the AI out there, I mean, I know I'm sure you do. Every day I get dozens of emails through LinkedIn and through my work email that is just really not worth my time. And I think business owners are even in it because finding a nice business to buy is really everybody's kind of

dream to own a business. So a lot of that stuff is just not going to go anywhere. A lot of mid-career executives would love to buy a business. But do they have the resources to do it is the question. You don't want to spend a lot of time. And you're right. I've seen deals drag on for a year or longer and then go nowhere. And then that seller has...

Kind of a burnout because they've got they spent all that time. They spent usually money on diligence. They've been distracted from running their business. Their employees have been distracted. And if the employees find out about it, then employees are concerned about their jobs. And it's just it's not not a great thing.

So you wanted number one. And that's why, I mean, having an investment banker or broker in there that knows, I mean, that's their number one thing is to make sure that a buyer is legitimate and the buyer has that capital. Buyer has the relationships to get the transaction over the finish line. Yeah, I saw a post recently. It might have been a post I wrote about.

This idea of charlottes and buyers and I think it was an M&A professional said, like, John, that's our number one job is to screen out the illegitimate buyer, the person that can't get the money. Because for all the points you raise, if they can't close, it's a broken deal. And that will negatively affect the value of the company downstream because the

Any buyers that may have been interested are all of a sudden going to have their radar up saying, well, what did they find during diligence that caused them not to close? May not be anything to do with the business. May it be everything to do with the buyer. But that doesn't necessarily mean that the deal won't be undermined. So it's great advice for our listeners. And I appreciate you sharing all of your wisdom. Is there, if people wanted to reach out to you and learn about your firm and

And is there a good place to do that? Are you more of a LinkedIn guy or where would they do that? Yeah, I'm on LinkedIn. Feel free to reach out to me over LinkedIn. We've got Borgman Capital website that can be reached through. Or like I said, for potential investors, we've got pastthehat.com as well. Awesome. So past the hat and we'll put Borgman Capital and your LinkedIn profile in the show notes at builttosell.com. Sequoia, thanks for doing this. Yeah, thanks for having me. This was a great conversation.

And there you have it for today's interview between John and Sequoia. If you enjoyed today's podcast, be sure to hit that subscribe button wherever you're listening to today's show. And if you want to help support Built to Sell Radio, I encourage you to leave a rating and review. You can leave a rating and review wherever you listen to your favorite podcasts or head over to our YouTube channel at Built to Sell where you'll be able to leave a comment.

and review. For show notes, including links to everything referenced in today's podcast with Sequoia, you can visit his episode page over at builttosell.com. If you know someone who'd be a great fit to be a guest right here on Built to Sell Radio, you can nominate them. You can head over to builttosell.com slash nominate, where there you're going to have a chance to nominate yourself or someone else to be a guest right here on the show with John. So

Special thanks to Dennis Labataglia for handling today's audio engineering. And thank you to our community of certified value builders who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with an advisor or learn how to become one yourself, head over to valuebuilder.com. I'm Colin Morgan, and I look forward to talking again next week.