Ep 489 Inside the Mind of an Acquirer: Sequoya Borgman on How Independent Sponsors Buy Companies, Structure Deals, and Spot Pretenders
Apr 11, 2025
auto_awesome
Sequoya Borgman, founder of Borgman Capital and an expert in independent sponsorship, shares insights from his experience acquiring 19 companies. He discusses how independent sponsors vary from traditional private equity, utilizing deal-by-deal funding. Sequoya highlights the evolving landscape of lower middle-market acquisitions, emphasizing the rise of high-net-worth individuals. He explores the intricacies of deal structuring, CEO expectations, and the importance of trust between buyers and sellers to ensure successful transactions.
The independent sponsor model allows acquirers greater flexibility by raising capital on a deal-by-deal basis instead of through traditional funds.
Companies with around $3 million in EBITDA and managed by tired owners present prime acquisition opportunities due to potential for revitalization.
A successful acquisition requires not only a well-structured financing deal but also effective transition management involving former owners to mitigate risks.
Deep dives
Understanding the Independent Sponsor Model
The independent sponsor model offers a unique approach to business acquisitions, as it involves raising capital on a deal-by-deal basis rather than through a committed fund. This method allows acquirers to have more flexibility and opportunism in finding attractive companies to buy. For instance, Sequoia Borgman highlighted that their firm has successfully acquired 19 companies without a traditional fund structure, relying instead on a network of approximately 500 investors to support each deal. This model provides potential investors with access to lower middle market businesses, which are often cash-flowing and attractively priced.
Identifying Ideal Acquisition Targets
When considering potential acquisition targets, businesses with around $3 million in EBITDA and managed by tired owners stand out as prime candidates. These companies typically possess established cash flow and a strong market position, yet may not be adequately optimized due to their owners' exhaustion or lack of interest in growth. Borgman emphasized that these scenarios create opportunities for acquirers to revitalize such businesses and enhance their value through improved management and operational strategies. This focus on tireder ownership aligns with the broader strategy of seeking businesses ready for new leadership to drive future growth.
Navigating Competition in Business Acquisitions
The competitive landscape for acquiring lower middle market businesses is evolving as new platforms and online aggregators begin to democratize investment opportunities in this space. Although traditional private equity firms have started targeting retail investors, Borgman mentioned that few platforms effectively facilitate access to established cash-flowing businesses. The rise of these online models may dilute the sophistication of the buyer pool, but Borgman believes that investor needs are shifting towards quality deals over mere access to investment opportunities. This dynamic causes independent sponsors to adapt their strategies and leverage their unique positioning to attract serious investors.
Structuring a Typical Acquisition Deal
A typical acquisition deal for a lower middle market business could involve a structure where the purchase price is based on EBITDA multiples, often utilizing a mix of senior and mezzanine debt alongside equity investments. Borgman explained that financing for such deals generally sees banks lending up to three times the EBITDA figure, accompanied by additional risks supported through subordinate debt. The combined financing allows for approximately 50% debt and 50% equity share, which can cover purchase costs and provide operational cash flow. Constructing such a balanced deal structure is crucial for maintaining cash resources while ensuring profitability.
The Importance of a Strong Transition Plan
A successful business acquisition hinges not only on financial structure but also on how well the transition from the previous owner is managed. Borgman stressed the significance of having former owners maintain some equity stake and involvement for a smoother transition and knowledge transfer. This involvement helps mitigate risks often associated with a new leadership structure where owners previously had deep-rooted connections with the business. A clear transition plan fosters trust and facilitates a collaborative environment, ultimately enhancing the likelihood of success for the acquisition.
Sequoya Borgman has acquired 19 companies and exited two. He’s raised capital on a deal-by-deal basis, working outside the traditional private equity model. In this episode of Built to Sell Radio, Borgman explains how “independent sponsors” operate—and why more wealthy individuals are now pooling money to buy lower middle-market businesses.
You discover how to:
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
