#23 | Michael Sarner: Made $100 Million in Plumbing Supplies

"This guy just made $100 million doing plumbing supplies." Michael Sarner's team wires those checks to founders, and it still tickles him.More on Michael Sarner and this episode: thedealtablepodcast.com/episodes/michael-sarnerSarner is the CEO of Capital Southwest, a publicly traded business development company that has grown from $285 million in cash to $2 billion in assets. It lends to lower middle market companies doing $3 to $15 million of EBITDA, usually as the debt in a leveraged buyout, and carries roughly $1.3 billion of market capitalization.His core argument is a risk one. Lower middle market loans with real covenants, monthly reporting and 3 to 4 times leverage produce better risk-adjusted returns than upper middle market paper running at a true 7 times, and he calls banks competing at 3.5 times the height of irrationality. Monthly reporting is not paperwork, it is an early warning system.For any owner thinking about institutional capital, the checklist is the value here: positive cash flow, bench strength underneath the founder, no customer or supplier concentration, financials that survive scrutiny, and a three to five year plan. Also covered: what rescue capital actually is, and why "if you get hit by a bus" is a genuine underwriting question.Michael Sarner is the chief executive of Capital Southwest, a publicly traded business development company in Dallas that lends to lower middle market businesses. Under his leadership the firm has grown from $285 million in cash to roughly $2 billion in assets.KEY MOMENTS00:00 What a BDC actually does07:25 Why lower middle market is safer08:35 The typical deal: $3M to $15M EBITDA12:10 Bank competition and irrationality16:40 Covenants as an early warning system19:06 What rescue capital really is21:58 Being the first institutional money in39:10 True leverage: 3.5x against 7x51:41 "$100 million doing plumbing supplies"55:15 Roll-ups and what founders build towardNewsletter: thedealtablepodcast.com/connectCapital Southwest: capitalsouthwest.comLane Carrick on selling a business, The Optima Advantage: amzn.to/48nLElWFollow The Deal Table: YouTube, LinkedIn, Instagram, Facebook, TikTok, XThe Deal Table is hosted by Ryan Harper and Lane Carrick, filmed in Dallas, and produced by Harper Belmont Media.Sponsored by Capital Southwest and Vela Wood.