Ep. 142: Sequoya Borgman, Borgman Capital | Buying Family Businesses and Preserving Culture

0:00Sequoya Borgman: Hey, everybody. Before we get started with today's episode, I want to take an opportunity to tell you about my new book, AI Marketing Blueprint. It just hit number one bestseller status across multiple categories on Amazon, and it walks you through a proven framework that we are taking our clients through here at How to SaaS and how to stay relevant and visible in a world with AI platforms. One of the biggest problems that we have seen across clients and companies is that the traditional channels that they relied on, like paid search or SEO, have declined significantly or are getting more expensive and competitive.

0:33Sequoya Borgman: The reason for this is that a lot of buyers are starting to self-educate themselves and research on AI platforms. So a lot of that volume that was previously going to those channels is now moving to these new AI platforms. So to stay relevant, the book walks you through seven new rules that companies in all kinds of verticals and industries need to consider so that they can continue growing their pipeline and revenue and ultimately their enterprise value. So if this applies to your business or one of the companies that you've invested in, I definitely recommend that you pick up a copy. It's available on Amazon, on Apple Books, on Barnes and Noble, and even share it with your teams.

1:10Sequoya Borgman: Grab a bunch of copies so that you can kind of consume the content together and start to apply it to your business. And with that said, let's move on to the episode. Welcome to the Private Equity Value Creation Podcast, where we interview leading investors, operators, bankers, and advisors to help you answer one question. How do we increase the enterprise value of our companies? My name is Shiv Narayanan, and each episode, I will dive deep with a guest to help you become a better value creator and capital allocator. So with that said, let's jump right in and let's get started with today's episode.

1:45Sequoya Borgman: My guest today is Sequoia Borgman, and he is the founder and CEO of Borgman Capital. And what I really enjoyed about this conversation is, one, Borgman invests in companies that are very different from most private equity firms. They invest in manufacturing and a lot of other legacy industries as well. And I really appreciated Sequoia's approach in terms of how they look at buying and holding these companies and at the same time focusing on the cultural side and the people side to make sure that there is great business continuity, that they're minimizing risk, and they're actually growing these companies long term.

2:19Sequoya Borgman: And I think it's a bit of a refreshing take in the private equity world where people are really, you know, bound to hold periods and returning capital to LPs. And sometimes it leads to more short term decision making. And I really appreciated Sequoia's approach. So I think there's a ton to learn from it and I'm sure you'll take away from it as much as I did. So with that said, I'll leave you to it. Enjoy the episode.

2:47all right sequoia welcome to the show how's it going good thanks for having me on the show

2:51Sequoya Borgman: yeah excited to have you on so why don't we start with your background in the firm and then let's go from there sure uh happy to start there so my background before i launched the firm about a decade ago, I spent 18 years in public accounting, really working on transactions across the board, a lot of private equity transactions. And after doing that for almost two decades, decided to leave and launch a firm. And we haven't really looked back. We've bought 20 plus companies since then and really have grown a nice kind of lower middle market private equity firm that invests primarily family or founder-led businesses all over the country.

3:37Businesses under$150 million revenue, under$20 million of EBITDA. And at this point, we've got five locations around the country. We've got 15 people on the team and really focused on, again, nice established family businesses that have been around, some of them for generations. and we've invested in a lot of industrials and food type businesses, but we're very industry agnostic. We've got some data analytics, snowflake consulting business and kind of all across the board right now.

4:13Sequoya Borgman: Yeah, what I found interesting about looking through your portfolio is that a lot of the companies that you're deploying capital into are almost like, I don't want to say old school, but more traditional markets and not like software companies necessarily or B2B companies, technology companies. Can you talk a little bit about that? What's the focus there in terms of the types of companies you're investing in? Yeah, I mean, with my background more in accounting finance, really focus more on the cash flow of the business rather than what vertical the business is in. So we're looking at really nice, steady cash flowing businesses that aren't very cyclical, businesses with good management teams in place.

4:51and they can bear the leverage that we put on these businesses when we buy them. That's really what we're looking at is businesses that fall nicely and kind of leverage buyout model. And again, we're investing. We're the first institutional investor in these businesses. So they're all family businesses, all founder businesses. And we're really more focused on that, on the family or founder relationship versus the industry.

5:18Sequoya Borgman: Understood. And so how do you vet these different types of companies? Because it's almost like there's no overarching theme across these portfolio companies, right? So walk us through that. Like I get the financial analysis and trying to figure out, okay, it's a positive cash flowing business. But beyond that, what are some of the traits that you're looking for? Yeah, we look at about 1 ,500 companies a year to buy two or three a year. So we look at a lot. You really know when you see a nice business based on their numbers. But then you have to meet with the family, meet with the founder, see if our interests are aligned, not just through the transaction, but for the long term.

5:56If it's a founder that really cares about their employees, cares about their community, cares about maybe the charities they're supporting. Those are the types of businesses that we really like to buy or long term hold. So we're looking for businesses that are going to be around for the next three, four, five decades. And that's more of our focus. So we look through a lot of businesses, I think, is the short answer to find a couple of real diamonds in the rough.

6:23Sequoya Borgman: When you say a long-term hold, is there a limit or a threshold in the floor of which you want to exit the business? From my perspective, finding really good businesses is the most difficult part of what we do. And there's no real reason to sell a strong, performing business because you're just going to have to deploy that capital into another business, which is hard to find. So we can hold long-term in the deals that we do. And that's really the focus. It's not a two or three-year flip. Like some models, it's more of a longer-term hold. Got it. And how do you deal with that on your own investor side with LPs and people who are funding these transactions for the firm?

7:07Sequoya Borgman: Are you trying to hit certain benchmarks for different funds that you're raising? Or is it more that you're deploying your own capital? help us understand that more? My own capital and my partner's capital, but we do have over 500 LPs that have invested with us over the last decade. And for the most part, we set up each new platform as a special purpose vehicle. So that has an indefinite fund life in that structure and we can hold longer than a normal 10-year fund life in that situation. And we'll buy out investors early. If there's investors that need some liquidity, we'll do a redemption or some type of buyout transaction if it's warranted and hold for long term.

7:54Because me personally, some of these deals, I'm the largest investor in the deal or second largest investor in the deal. And I don't see a better place to put my capital these days than in these nice, closely held businesses.

8:07Sequoya Borgman: You said something earlier that resonated with me. You said we also look at companies that are actively involved in their communities or who they're contributing back to or charities that they're contributing to. Talk about that a little bit more. What's your philosophy on investing and how does that part correlate? Well, our best investors' investments have been where the owner really cares about their employees. Those businesses and employees care about their customers, the businesses do better. And if we maintain kind of what the owners built and really just be a nice steward of those strong businesses, those transactions do very, very well for us.

8:49So we continue to support the charities in those communities that these businesses operate in. We continue to support the employees and really try and grow these businesses. I know all private equity investors really want the businesses to be successful and grow. So that's no real different. But that's really a focus of ours. There are some funds out there that go in with their value creation plan and try and cut costs or increase margins. And they've got a very strict plan. Ours is more buying really nice businesses and trying not to mess them up. A lot of the best intentions don't necessarily turn out to get the value creation that you expect.

9:33So our plan is buy really good companies, support really strong management teams, and stay in for the long haul.

9:41Sequoya Borgman: Yeah, it reminds me of this book. It's one of my favorite business books. It's called Small Giants. And it talks about this idea of having a business that's tied to its community, suppliers, the whole supply chain, employees, everything. and it creates a better impact across the board and also leads to better companies. And it's a different approach to value creation. So help us understand that. Talk about your value creation philosophy and maybe how it's different from more traditional private equity. Yeah, I mean, we have the same tool books that all the private equity firms do. And we do have a value creation lead on our team that really puts together the value creation plan.

10:19And you know what the traditional levers are to grow EBITDA and increase your multiple, all those types of things, the roll-up strategies. And we do focus on those. But really, again, we're supporting really strong management teams. A lot of these companies that perform like this, they don't transact very often. These family businesses, we've bought companies that have been in the same family for over 100 years. You have to be in the right place, right time. And most business owners, they have a lot of options for these strong businesses. They can hire a professional management team and step out of the business if they want to kind of spend less time in the business or maybe retire or move to Florida or one of those things.

11:04But the business owners that do want to take some chips off the table and partner with somebody like us, those are the ones that we're really focused on. And the value creation plan, I mean, it depends on the business. I mean, some are strategic growth opportunities. Others, organic. It really depends on what the opportunities there are, how fragmented the industry is, what the management team is capable of handling. There's a lot of factors that go into that. Yeah, I guess I'm more curious about how you approach that, given the different types of companies you have.

11:40Sequoya Borgman: So because there's no if it was a specific type of business, you can have a uniform approach across the board. But in this case, you're being more opportunistic in terms of which companies you're investing in. So walk us through that process a little bit more. Like how involved are you getting or which levers maybe are you more supporting versus others? And when you're vetting the business, is that a big part of figuring out what the value creation plan is or how you might help? Yeah, of course it is. before we go down that road, like I said, we look at over 1 ,500 businesses a year. We put together a strong outside board of industry experts.

12:17So even though we're more of a generalist, every board that we have, every business we have have a very specific board that all the board members are really strong in that industry. They know the industry inside and out. And we rely on a lot of consultants in our network as well to really help with the industry aspects of it. But again, we're buying really nice businesses with owners that want to partner with somebody for the long term. And that's a lot of the value is in the owner of these size businesses. And we are very involved. Most lower middle market businesses, they don't have the resources, middle market or larger companies out there.

12:58And we share value across the portfolio, even though maybe they're in disparate industries. There's a lot of overlap in best practices and issues that the industries are facing, all that kind of stuff. So we try and share best practices as much as possible. And really the strong outside board helps us address the kind of industry disparities.

13:23Sequoya Borgman: Yeah. Yeah. That definitely makes sense is that you're getting involved with the owner. Are you requiring the owners of the businesses to stick around after you make the investment? and how often do they stay? That's our preference. Some of them stay. Some transition almost immediately. We work with them to find a really nice successor that culturally will fit with the business. These owners know the business better than anybody. Most of them have run that business for 30 or 40 years, so we work closely with them. Frankly, that's the biggest risk in investing in these unprofessional family businesses is that ownership transition.

13:59The owner is very, very involved. Sometimes you have to hire two or three people just to replace what that owner was doing. There's some risk that you lose some customers or lose some key employees in that process. We really handle that with kid gloves. We try and support the owner, keep them happy as long as they're willing to run the company. When they're ready to transition out, we work with them to find the right replacement. That's one of the areas that clearly us and a lot of the private equity groups out there have made mistakes on leaders for these businesses. So sometimes you'll have to come in with a second leader if the first one doesn't fit with that organization.

14:43Yeah.

14:45Sequoya Borgman: In terms of the value creation or just operational plan, how much of it is led by the firm versus just trusting the management team to run with where they see the biggest opportunities? Well, our responsibility is really look at big picture strategies. So we'll clearly come up with a strategy plan. But most of these teams, they can only focus on one or two items at a time. They just don't have the bandwidth and they're really focused on running day-to-day operations. So each company will have one or two value creation ideas that we want to implement pretty soon after the investment and whether that's pricing or sourcing or production.

15:30Each one of these companies, you can kind of see that there is some low-hanging fruit or some hairier parts of the transaction, or maybe it's customer concentration. There's always something that we know will create value, create more interest for the next buyer. We'll focus on

15:44Sequoya Borgman: that one or two things. Even though maybe we have a list of 10 things we'd love to do, we know the team really can't implement that many things at once. So we'll slowly implement the top two or three value creation levers. And again, the management team's really focused on running that business. So we're going to want to overwhelm them right off the bat. We'll get back to the show in just a moment. But before we do, one of the most common and important value creation levers that we hear about on the show from private equity investors and our own PE partners is go to market. Yet when these same PE partners bring us into their portfolio companies or new target investments that they're exploring, we find that the marketing function is quite immature, underutilized and under optimized.

16:31Sequoya Borgman: And so that's a huge opportunity that we see inside these companies. And if you have a portfolio company that you feel like it's scaled a lot faster to drive more pipeline and revenue, or you're looking at a new investment where you feel like that could be core to your investment thesis, But we'd love to explore that with you and figure out how we can partner with you to drive more enterprise value creation on the marketing side. Similar to the way that we've done with major PE firms like TA, Updata, HG, SDG, and many more. At this point, we've done hundreds of engagements across hundreds of industries and verticals.

17:04Sequoya Borgman: And we have a ton of benchmarks and frameworks that we bring to these engagements to help you drive as much enterprise value as quickly as possible. So if that sounds like something that you might be interested in, you can just email me directly at shiv at howtosass.com or go to our website and schedule a demo. And we'd love to speak with you about it further. And now with that said, let's get back to the show. What about the sophistication of these companies? Because these are more legacy industries like manufacturing, distribution, et cetera. I would imagine there's a bunch of areas that need to be professionalized.

17:39so how do you guys approach that side yeah i mean clearly these businesses aren't very professional most times really the finance functions the number one area that we focus on will most likely bring in a new cfo or higher level controller the focus on the finance function we've put in new erp systems you name it we've done what's what's necessary to professionalize these businesses. Again, we're getting them ready for the next level. Hire up private equity firms or bigger strategics that would have interest, but don't want to do the heavy lifting of

18:15Sequoya Borgman: professionalizing these businesses and going through that transition from family or founder leadership to more of a professional managed company. So yeah, all of them. But again, we do that over three, four, five years. We don't do it all in the first 90 days. It takes time to professionalize systems, processes, production. And some people just, they're hesitant to change. So you'll have to replace some of those key roles in order to make those that stick. I guess some of those things also require like an upfront investment, right? Where you're purposely taking a step back or slowing things down to change processes or professionalize.

19:00So how do you look at that trade-off?

19:02Sequoya Borgman: I guess with your willingness to hold these companies for longer, there's a trade-off that's more reasonable, but I'm just curious how you look at that. Yeah, every dollar we spend, we have to get a return on that. So we're not spending money with consultants or CapEx or systems infrastructure unless we see a clear return on that investment within two or three years. That's really it. When you're doing an ERP implementation, it's really because at that point in that business lifecycle, it has to be done. Either you're losing business over it or there's a big upside. Same with any type of expansion we're doing.

19:43If we're doing the expansion, we need to get a return on that, any new capital that we're investing in business.

19:50Sequoya Borgman: A lot of the biggest investments really is in new management teams and really strong leaders. they're not cheap to bring in and that adds cost to the business. Especially if you're replacing one leader with three people, that costs more than you would expect. We bought a company one time when the owner of the business was probably the best salesperson I've met. We had to hire, I think, four or five salespeople to replace what he was doing alone. And yeah, those four or five salespeople are probably making more money than he was pulling out as an individual. Fortunately, the business grew and made up for it.

20:32But those are some of the biggest costs, just the people costs. And professionalizing a business, again, when you go from some of these businesses have been run by a nice, good size, profitable businesses, but run by a husband and wife. And then you have to bring in a new CFO, COO, CEO, maybe a VP of sales to professionalize that business. And then each one of them wants to put systems and processes in place. That's quite a bit of additional cost to add to that business. So they really need to get a return on each one of those dollars you spend. Right.

21:09Sequoya Borgman: And so how do you underwrite that? Because in some of these cases, and I'm curious if I'm wrong on this, but I would imagine, let's say, a traditional SaaS company or technology company, the growth rates are faster. But in these industries, there is way more work required to find faster growth. And sometimes the business's good growth rate might be in the single digits. So how do you underwrite that when you're investing more in professionalizing the business, adding headcount potentially, or professionalizing the management team? Because that return still needs to be there. So I'm curious how you look at that.

21:42Yeah, I mean, from our standpoint, we don't need to have the growth in order to get really nice returns because of the leverage that we're buying these businesses with. So, I mean, you buy a business with 50 % debt, 50 % equity, you hold it five years, that business pays off all that debt.

22:00Sequoya Borgman: I mean, you've doubled your investment in that five years without any growth, really, as long as you maintain that cash flow. So that's one of the benefits of kind of the leveraged buyout model is we don't need a huge amount of growth. If we were able to grow the business a little bit, maybe with industry growth, inflation, and maybe a little bit better than that, and improve maybe margins or cash flow, we can do really, really well on these investments. That's one of the benefits of doing what we do. It's a little bit different than kind of the SATH or high growth businesses that normally have very little leverage in there.

22:43And really all your return is based on that growth of the business and a little bit more risk too. And growth is hard.

22:51Sequoya Borgman: So it's not always necessary for us to get the outsized returns that we're trying to hit in these businesses, just maintaining what we've bought. I guess maintaining service in the dead and cash in the business as well is a strong hold thesis around that. Yeah. So sometimes you're worried more about the risks, the downside risks of these businesses than you are really on the growth strategy. Yeah. Yeah. And so how do you protect against the downside risk? Well, again, the downside risk is that you have the best ideas and best intentions, but it doesn't work for that business. and somehow it negatively impacts management team or a customer or some type of opportunity.

23:39And you see some reduction in your revenue or reduction productivity or margins or those types of things are a bigger risk in a leveraged deal than the upside that could potentially come from making changes in that business.

23:56Sequoya Borgman: mm-hmm what i guess one of the things you said earlier is that in in a lot of cases you're trying to buy these companies that have like 20 to 30 year life cycles like you you see a long horizon for them but then there are some uh risk factors or black swan events that can change that so what are some of the ways you kind of hedge for that or make sure that you are investing in a business that has that long-term potential well all all the businesses we've we've invested in have made it through a couple black swans in our careers. The last two decades, there's been a couple of those. And really since COVID, I mean, it seems like every other week or every month, there's something unexpected coming out of these businesses.

24:37So you really have to run them as, I mean, focus on what is within your control. There's not much you can do if there's another COVID or another 2008, 2009 that comes along. You just have to prepare for them, de-leverage the business as much as you can. That's the biggest risk in these leveraged buyouts is the leverage that's on there. And yeah, do what you can to really focus on the fundamentals and really just best business practices.

25:08Sequoya Borgman: Yeah, that's great. One of the things that I noticed, because we meet these kinds of businesses all the time and that are more traditional and in these industries where the bulk of the revenue is driven by relationships, by partners or salespeople or having a network or the founder really selling. And I would imagine in a model like yours where you're investing in these companies, like there needs to be a shift from that, especially if the founder is going to leave because that's a key man risk and potential downside of losing all that revenue. So how do you transition companies from that old model to a model where the business is more self-sustaining and has pipeline and revenue coming in predictably?

25:49The best way is to do it over a period of time. We do try and tie up the sellers either with some rollover equity or some type of earn out structure, maybe a seller note. But we also try and keep them involved with the business, keep them on the board for the long term, stay close to them, keep them involved with the business. That helps with the relationships if we're having a customer issue where we really need them to step in and help with that customer relationship. Those are the best transactions. And you don't transition them out day one. You take two or three years to transition that owner out if they want to transition out of business.

26:29Some of these owners, I mean, they're in their 40s or 50s. They just want to take some risk off the table and take some equity out for their family. And they want to continue to run the business. And that's less of a concern in those. the ones that the owner wants to take all their cash off the table and step out and retire and no longer be involved in the business, that's a much higher risk transaction. Those companies sell for a lower multiple and that's kind of built into the price that you're paying. So you're paying assuming you're going to lose a key customer or lose a key employee and that's why you're paying a lower multiple for that type of transaction.

27:07And we'll put in some contingent notes or something in that transaction. So if that happens, the owner bears some of that risk and we'll share that risk with the owner.

27:19Sequoya Borgman: Yeah. So I guess in those cases, that is that the business is healthy enough to handle that type of a loss. And then long-term, you're going to come out further ahead. Yeah. And again, it's built into price. It's no different than buying a company with customer concentration. Those companies are hard to sell. They sell for a much lower multiple. You can't finance them and put as much leverage on the business because there's a lot more risk if you lose a key customer in that situation. So number one is how do you diversify that customer concentration? Either you buy another company similar size, your customer concentration goes down by 50%, or you grow your other customers to make up for that concentration.

28:03I mean, something you go in with your eyes wide open, you build it into the price that you're paying for that business. And if you're able to solve that issue or transition all those sales relationships or reduce that customer concentration, then we get all that upside. And that's built into the returns that we're able to achieve if we're able to accomplish that.

28:28Sequoya Borgman: How do you handle continuing the culture side of the business, especially in cases where the founder is going to leave? Yeah, that's key. I read somewhere that the culture in a business is established within the first six months of that business starting. So culture is really, really hard to change in a business. And that founder or whoever founded that business, maybe it was the founder's parents or their third generation. That culture has been within that business for a long, long time. And so what we try and do rather than try and change the culture, maybe they could have a better culture, but we really try to find a leader that has a similar culture, similar mindset, and is able to step in within that culture.

29:13They're supported better by the management team. Usually it's easier to change, to bring in somebody with similar culture than try and bring in somebody that has a different culture and change that entire organization. Because a lot of times they'll have to change out their entire management team. It's hard for them to get support from the rest of the team. And that's a longer and more difficult transition. So we're focused more on the current culture of that business. Again, we're not going to buy a business that doesn't have a decent culture to begin with. When I walk around a company or walk through a facility with the owner, I really pay attention.

29:52Does the owner know all the employees? The employees talk to the owner. Or are they happy that they're there? All that kind of stuff. It's really a small thing that you really have to pay attention to when you're doing diligence. And you can get a good feel for what the culture is and whether it's a good culture or not. Just doing that. Yeah.

30:14Sequoya Borgman: What about the factors that affect business continuity, especially like now with AI? I'm curious, especially in terms of the types of businesses you're deploying capital into. How do you look at that in terms of business continuity and where the levers are for these companies? Yeah, I think AI is definitely, we're looking into ways to help. Like a lot of the businesses are buying, all the institutional knowledge is within the head of the owner or the management team. Not a lot is documented or put in systems and processes. And I think AI will help that. There are some AI tools out there to really get that information from the owner's mind or the owner's systems and emails into some types of documents that the next management team can follow and really good guidance.

31:03Sequoya Borgman: But there's so many AI tools out there right now. We're trying to kind of focus on the ones that really create the most value and really save the most resources. Again, all the time and effort in these businesses, They don't have a lot of resources. So if it's a business that's selling for 10 times EBITDA, if we spend a dollar, we need to get a 10 times return on that dollar. Or if it's selling for seven times, we need to get a seven times return on that dollar and no different with AI and what we're spending on folks on AI right now. Yeah, that's all. We're coming up on time here, Sequoia, but before we close off, if people want to learn more about you or the firm, what's the best way to get in touch?

31:47Yeah, they can reach out to me through LinkedIn or our website, gordoncapital.com are probably the two best ways to reach out to me.

31:56Sequoya Borgman: Awesome. We'll be sure to include all of that in the links in the show notes. And with that said, Sequoia, thanks for coming on and sharing your wisdom. I especially enjoyed your focus on culture and business continuity and just the softer side of building these companies. I thought it was a very refreshing take, so I appreciate doing this. Yeah, thanks for having me. Thanks for listening to today's episode. Before we close off, if you haven't already, go grab a copy of my new book, AI Marketing Blueprint. It just hit number one bestseller status on Amazon across multiple categories, and it walks you through a proven framework on how to scale revenue and pipeline in a world with AI platforms where customers are self-educating and learning a lot more off your website and where companies are struggling with declining inbound traffic volumes from paid search, paid social, and even organic and SEO channels.

32:44Sequoya Borgman: So if that sounds like you or a company that you're invested in, go grab a copy for yourself, your team or your portfolio company. And I'm sure it's going to help you out on your journey with that business. And with that said, thanks for listening today and we'll see you guys next time.