Podcast Summary: Acquiring Minds – "Buying in a Small Market, Building a Regional Powerhouse"

Episode Details

• Title: Buying in a Small Market, Building a Regional Powerhouse
• Host: Will Smith
• Guest: Jonathan Bornagol, President of Bunker
• Release Date: March 3, 2025
• Podcast Description: "Buying a business is an amazing path for many successful entrepreneurs. Learn how to buy a business from the entrepreneurs who have already done it."

Introduction

In this episode of Acquiring Minds, host Will Smith delves into the unique journey of Jonathan Bornagol, the President of Bunker, who successfully acquired and transformed a small document storage business into the leading provider in the Caribbean region. The conversation explores the intricacies of acquiring businesses in non-traditional markets, the shift from leveraged buyouts to growth equity, and the vital role of networking in deal flow generation.

Guest Background

Jonathan Bornagol embarked on his acquisition entrepreneurship journey over a decade ago in the Dominican Republic (DR), marking the country's first search fund. His background in investment banking and his MBA education at Babson College equipped him with the financial acumen necessary for evaluating and growing businesses through acquisitions.

Notable Quote:

Jonathan Bornagol [07:10]: "I never knew I was a salesman until I had to sell because my life depended on it."

Adapting the Search Fund Model to a Small Market

Initially, Jonathan anticipated finding retiring baby boomers seeking to sell their businesses, a common search fund thesis in the US. However, upon returning to the DR, he discovered that this trend was nonexistent. This realization forced him to pivot his approach significantly.

Key Points:

• Market Thesis Adjustment: Transitioning from a US-centric search fund model to one tailored for the DR's unique market conditions.
• Focus Shift: Moving away from family-owned businesses ripe for succession to opportunistic acquisitions involving multiple partners or foreign owners.

Notable Quote:

Jonathan Bornagol [01:05]: "The 3-4x that we talk about so often."

Acquiring the Document Storage Business

Jonathan leveraged his networking skills to identify and negotiate the acquisition of Bunker, a small document storage company partly owned by a friend's father. Despite initial resistance, his persistent and transparent approach eventually secured an 80% stake in the business.

Key Points:

• Networking Over Cold Outreach: Emphasizing relationship-building in smaller markets where reputation is paramount.
• Deal Structure: Maintaining the existing operator in a rollover equity arrangement to ensure continuity and leverage their expertise.

Notable Quote:

Jonathan Bornagol [36:34]: "Because in small markets, reputation is everything."

Growth Strategy: Four-Pronged Transformation

Jonathan implemented a comprehensive growth strategy focusing on four main areas to transform Bunker into a regional powerhouse:

1. Infrastructure Enhancement:

   • Warehouse Expansion: Constructing a state-of-the-art 50,000 square foot facility to overcome capacity constraints.
   • Real Estate Partnership: Collaborating with a local real estate partner to build the new warehouse without upfront deposits, securing a 20-year lease.

   Notable Quote:

   Jonathan Bornagol [52:49]: "We thought we were going to own multiple sites, but ended up building one large, efficient facility to centralize operations."

2. Building a Middle Management Team:

   • Hiring Key Personnel: Recruiting skilled managers to delegate operational responsibilities, thereby scaling decision-making capabilities.
   • Zero Attrition: Achieving a stable management team with high retention rates, fostering a culture of accountability and growth.

   Notable Quote:

   Jonathan Bornagol [75:31]: "We have zero attrition and amazing growth both financially and personally for our managers."

3. Refining Product Offering:

   • Customer Segmentation: Shifting focus to high-value "cold storage" clients, ensuring recurring revenue and strong client relationships.
   • Service Diversification: Introducing just-in-time storage solutions to enhance client dependency and satisfaction.

   Notable Quote:

   Jonathan Bornagol [79:06]: "We needed to get into the just-in-time model to strengthen our client relationships and add more value."

4. Digital Transformation:

   • Implementing ERP Systems: Upgrading to an enterprise-grade warehouse management system to streamline operations and improve accountability.
   • Data-Driven Decisions: Utilizing technology to monitor and optimize the storage processes, enhancing efficiency and scalability.

   Notable Quote:

   Jonathan Bornagol [80:37]: "Implementing a top-class warehouse management system transformed us into a digital native again."

Challenges of Small Market Acquisitions

Jonathan highlights several challenges unique to smaller, less mature markets like the DR:

• Cultural Dynamics: Family businesses often have deeper roots, making acquisitions more complex due to multiple stakeholders.
• Limited Deal Flow: Scarcity of opportunities aligned with traditional search fund theses necessitates creative sourcing strategies.
• Pricing Expectations: Sellers may overestimate the value of their businesses due to a lack of active market mechanisms for price discovery.

Notable Quote:

Jonathan Bornagol [22:18]: "In small markets, the cultural ties and family involvement can complicate the acquisition process."

Growth Equity vs. Leveraged Buyout

Jonathan diverges from the conventional leveraged buyout (LBO) model prevalent among search fund entrepreneurs, opting instead for a growth equity approach. This strategy focuses on reinvesting profits to fuel business expansion without incurring significant debt.

Key Differences:

• Debt Utilization: LBOs rely heavily on debt financing, whereas growth equity emphasizes equity reinvestment.
• Value Creation: Growth equity centers on organic growth and operational improvements rather than financial engineering.

Notable Quote:

Jonathan Bornagol [67:40]: "Growth equity is about high growth and reinvesting capital to scale, rather than juggling debt obligations."

Exit Strategy and Return Expectations

Jonathan discusses the importance of aligning exit strategies with investor expectations, especially in small markets where multiple expansion is challenging. He advocates for focusing on Multiple on Invested Capital (MOIC) rather than solely relying on Internal Rate of Return (IRR).

Key Points:

• MOIC Over IRR: Emphasizing absolute returns without the constraints of time-bound IRR hurdles.
• Market Limitations: Recognizing the difficulty of achieving multiple expansions in smaller markets due to limited buyer depth.

Notable Quote:

Jonathan Bornagol [84:35]: "Always think about MOIC as it provides a clearer picture of your investment's success over time."

Lessons Learned and Advice

Jonathan offers valuable insights for entrepreneurs looking to pursue acquisition entrepreneurship in non-US or smaller markets:

1. Embrace Networking: Building and leveraging relationships is crucial in markets where formal deal flow mechanisms are limited.
2. Be Adaptable: Adjust search fund theses to fit local market conditions rather than rigidly adhering to US-based models.
3. Focus on Growth Opportunities: Prioritize businesses with high growth potential and operational efficiencies over those with high entry multiples.
4. Understand Cultural Nuances: Recognize and navigate the cultural and familial dynamics that influence business ownership and succession.

Notable Quote:

Jonathan Bornagol [71:51]: "If you're a good salesman, don't be scared of a small deal. You can grow into it faster than you think."

Conclusion and Future Plans

Jonathan's success with Bunker has positioned him as a budding private equity investor in the Caribbean region. He plans to raise a fund focused on acquiring and scaling businesses across multiple countries, leveraging his entrepreneurial mindset to drive growth and value creation.

Final Thoughts:

• Entrepreneurial Spirit: Despite transitioning towards private equity, Jonathan remains committed to the entrepreneurial aspects of acquisition entrepreneurship.
• Continuous Learning: Emphasizing the importance of becoming an expert in diverse business models to effectively scale and manage a portfolio of companies.

Notable Quote:

Jonathan Bornagol [103:12]: "I love becoming an expert in new industries and morphing into different roles to drive growth."

Notable Quotes Recap

• Jonathan Bornagol [07:10]: "I never knew I was a salesman until I had to sell because my life depended on it."
• Jonathan Bornagol [36:34]: "Because in small markets, reputation is everything."
• Jonathan Bornagol [67:40]: "Growth equity is about high growth and reinvesting capital to scale, rather than juggling debt obligations."
• Jonathan Bornagol [71:51]: "If you're a good salesman, don't be scared of a small deal. You can grow into it faster than you think."

For Further Engagement:

• Live Q&A with Jonathan Bornagol: Scheduled for Wednesday, March 19th. Register Here
• Connect with Jonathan: Follow his journey on LinkedIn Jonathan Bornagol.

This episode provides a compelling narrative on navigating acquisition entrepreneurship in challenging markets, underscored by Jonathan's strategic pivots and commitment to growth. Listeners gain actionable insights into adapting traditional models to fit unique market landscapes, emphasizing the power of networking and strategic reinvestment.