The Biggest Advantage Capital Southwest Has Over Other Lenders

Big advantage that we have versus other lenders is we're publicly traded. We have very patient capital. We're not pounding the table.

Michael Sarner is the Chief Executive Officer of Capital Southwest Corporation. Michael leads one of the country's premier lower middle market lenders focused on providing flexible capital solutions to growing businesses. With deep expertise in portfolio management and middle market finance, he has built a career around helping companies scale and thrive in competitive industries.

Our typical deals are between $3 and $50 million of EBITDA. These are founder-owned businesses that are going to seek out their first institutional capital. Our capital tends to stand above others, and particularly banks. They've got to be significantly inside the cost of capital that we'll provide for them to win, because nobody really wants to work with them. Capital Southwest, you know, when we come to town to visit our old shareholders all over the country, it's always a warm smile and a strong handshake.

Well, Michael, welcome to the deal table.

Thank you.

The Pig Room at Old Parkland. Is there anything like it?

Have you seen anything like the Pig Room before? It's clear why it's named. I can't tell whether it was named after the pigs or vice versa.

Well, you know, this is Harlan Crow's creation, Old Parkland, and he can do whatever he wants here. The, the red painting behind you was actually his, right? So clearly his knowledge of real estate exceeds his knowledge of— well, not his knowledge of art, but his ability as an artist. But it's his big run. So here we are. What a dramatic setting. And old Parkland, what a great campus of capitalism to, to host this. You've got a really interesting background and I'm so impressed. You've basically built a billion-dollar business that you took over in 2015.

That's correct.

And you basically created an entirely new mandate for this business, a business plan. You've executed it. Did you think you'd be at $1 billion today?

I mean, this was the plan. Yeah, I remind that to everybody in the company that this is where I said we'd be. I mean, things have actually, quite frankly, fell into place. We've had some good fortune. Obviously, we've hired a lot of good people and we've had, you know, kind of just executed on what we were going to do. Yeah. But, you know, going back to this company is such an interesting company. Our company actually started in 1961. It was founded as a SBIC. Went public, raised $15 million in equity.

Capital, which is a lot in 1961.

It is. I have all the documents on my, on my table in my office and never went back to the capital markets. That grew the $15 million in about 6 different minority equity positions to about $1.5 billion over 50 years, which was a wonderful success. But, you know, the company converted into a BDC or business development company. In 1988, and no one's really sure why. But business development companies require you to have granularity in assets. And this company basically had only several deals, and all of them grew to be so sizable that it no longer could make investments into those companies.

So they converted to a structure that no longer served its purpose. 100%.

So as successful as they were, they kind of grew out of the structure. And so from 2000 to 2010, the company with a lot of other BDCs coming— basically this industry, and I started in it in the late '90s, early 2000s— grew from nothing to today there's hundreds of BDCs. And so there really wasn't anything to compare versus Capital Southwest back when. But as soon as those other companies grew and developed, now this company was no longer paying a dividend relative to everybody else because BDCs pay significant dividends. It traded about a 50% price to book. They got a nasty gram from one of the shareholders who today is one of our largest shareholders saying, do something, sell the company. Close the gap. Yeah, exactly. They changed the board over in 2014. Basically, some of them quit and others, they were pushed. They brought in a new management team.. And they brought in, you know, a few of us to kind of set strategy. So instead of being a, you know, an equity kind of investor, we spun out all of those assets in a tax-free spin and left the BDC Capital Southwest with $285 million in cash. And then 3 of us, 3 employees, with the notion that we're going to be a lower middle market lender.

Yeah.

So it started there and sort of it's grown, you know, ever since.

So for our listeners that aren't familiar with the Business Development Corp, tell us the rules of a BDC.

So BDC is set up basically years ago. The government wanted more lending in small businesses. And to do so, they incented businesses to create structures where all of your earnings had to be distributed to shareholders. So essentially, nearly 100% of our earnings on an annual basis that we make go out in the form of a dividend. But to do so, you have to make investments just in companies. It can't be investing in financial instruments. You can't be investing out of the United States. It was meant as a US policy to create more lending in the lower middle market space.

So you get a tax advantage for the structure.

You do.

The rules are you have to invest it in operating businesses in a certain size segment.

That's exactly right. Okay.

All right. Did you have expertise in lending to middle market businesses that you brought to the table to make that conversion?

So, yeah, so my previous to Capital Southwest, I had my background started years ago, unfortunately.

You look pretty young, but, you know.

I feel pretty young, but I started in public accounting years ago, but quickly ventured into financial companies and several different sorts of financial companies, built up a background, but I kind of happened across a company called American Capital, which was in a similar place in 2000. It just gone public, had raised $150 million, had no infrastructure. I was the 6th employee. And we grew that to nearly $15 billion in assets and 1,500 employees.

So I— Lending to middle market businesses?

Lending to middle market businesses. We actually, we started doing exactly What this company does was lending to small businesses. That company sort of got off track a bit in terms of it decided to go bigger and bigger and bigger. So they eventually, you know, the average size in the, you know, by 2012 was probably around $500 million versus our companies that are, you know, enterprise value is probably more like, you know, between $50 and $150 million. So the answer is yes. So I've seen quite a bit on the investing side. But, you know, my strength has always been on the strategic side, you know, on the capitalization side, kind of strategic direction. So coming here, you know, we had to build a deal team out. I mean, we started off with a few people that knew maybe, you know, 10 sponsors. And so we were getting— and you know how this works. So you're seeing some deals, usually not their best deals, and you'd lose, lose, and then maybe win. And you did a deal that was a little hairier than you wanted.

Sorry, I won.

Yeah, exactly. But eventually, you know, we've grown that 10 to— we've now done a deal with— in the last 10 years, we've done deals with 150 different sponsors, and none of them more than 4 deals. So not really— no concentration. We've got a deal team of 17 people and another back office of another 17.

Office here in Dallas.

All Dallas.

And when you say deal, are you.

Talking about like a loan? Yeah. So these are all going to be loans. So typically these are founder-owned businesses that are going to seek out their first institutional capital. Let's say it's a 65-year-old man. He's like, hey, I've done this. I'm ready to do something else. And generally in those situations, they're selling to someone, to private equity, and maybe they're rolling over, you know, 25% of the business. They're going to stay involved for a few years. Other instances, it's a family, whereas the younger— the siblings are ready to take over the business and dad or mom is ready to kind of ride off into the sunset. Change of control there where they may roll over 40% of the business. So they still— so the notion there is they're going to ring the bell once, right, with the initial sale, but then they're going to stay with the business to be able to create more wealth on the second time around.

So is it like an acquisition loan? Is that what you're doing?

So we are the debt in a— yes, in a leveraged buyout. And so typically our typical deals are between $3 and $15 million of EBITDA. So it's kind of interesting. This is satisfying. The average deal size at origination is about 5 or 6 million of EBITDA, and usually— so leverage is usually 3 to 4 times. So we're giving them $15 to $20 million of debt, and then we'll usually provide some level of an equity co-invest. So that might be somewhere, you know, $1 million to $2 million alongside the sponsor. But our average EBITDA of the portfolio companies that we have, and we have about 130, is, you know, $18 or $19 million. So that's all either organic growth or M&A. A lot of these companies are kind of buy and build. We were talking earlier, sort of some of the doctor practices that are, you know, you're seeing a roll-up strategy. We see a lot of those. In many instances, these are founders or business owners that have, they're either wanting to move on or they want to bring this to the next level and they're all out of ideas. They're professionalized in the way they have audits, right? They've got a controller, they've got a CFO. They're clean companies. They've got cash, you know, cash flow history, but they don't have the ability to take it to that next level. And so that's where the private equity comes in. You know, they think they can bring it to more success.

A lot of people think, and I, you know, experience this with business owners, that there's only one way and they sell the business and they leave. The last 3 deals we've done at Optima were recaps where our seller kept 20% of the equity. And private equity bought 80%. They had taken the business as far as they could take it with their capital and their resources. In some cases, they, you know, one of them was a professional that wasn't getting to practice anymore because he was so busy running the business. And he said, I just want to go back and practice my, you know, my skill and I don't want to have to run the business. Private equity put a COO. And the most recent one, NextGen Partners. I don't know if you know NextGen, Jeff Boyd's group out of Chicago. They bought a business we represented, commercial landscaping firm. And guy started cutting grass in college and turned it into a $30+ million commercial landscaping business. Wasn't getting to see his wife and kids. Said, I'm not having any fun. They brought it, you know, they have, I think they call them entrepreneurs in residence or something. So they put a CEO in at closing, but our guy stayed, moved over to business development. You guys may have written a check.

For all I know.

You know what, when you said that, it sounded familiar. We actually see quite a bit of landscape businesses. Those are a little harder to find yes, but there are.

There's been a lot of activity there. I don't know how many landscape firms are left that hadn't been acquired, but.

So, like right now it feels like, you know, rumor mills on some levels, there's plenty of money out there, but on other levels money is drying up. What's the reality?

You know, it depends on where you live, I think, in the middle market. In the lower middle market, The deals are plentiful. I mean, and it's always been a drumbeat of founders wanting to sell. I think the M&A market over the last 2 years for large upper middle market transactions has slowed down. And that's a reason why in our lower middle market, where typically, you know, it's not nearly as competitive and the pricing is usually wider for these loans, for these instruments, they tightened up because we're seeing with the lack of transactions on the upper and middle market, you've seen them kind of venture down. We've also seen banks. Banks are definitely risk-on right now, which is not— honestly, that's very inconsistent. And they're actually trying to win deals literally to 3.5 turns. These are, you know, cash-based loans. These aren't asset-based. We're used to competing against banks when they're doing a turn and a half, really almost against the receivables. And then you see a mezzanine underneath them. We provide— our company provides what they call a unitranche loan, which is both the senior and mezz together. And, you know, a big advantage that we have versus other lenders is we're publicly traded. So we have very patient capital. We don't have a 3, 5, 7-year time horizon where we're like, we need our money back. We're not pounding the table. So to answer your question back, it's like there, there's plenty of M&A going on and it's improving since April. I would say since Liberation Day, things were starting to pick up and then liberation came. And everything froze for a period of time, probably I would call it 3 or 4 weeks. And then I think people understand what the state of play is right now. You know, the other thing that's causing concern is just, you know, interest rate risk. But that's seemingly, you know, assuming that comes into focus. The thing about every market, but specifically our market, is we just want to know what the state of play is, where rates are going to be, what the tariffs are going to look like. Our companies need to have that kind of direction. To be able to move forward in M&A. So that's one of the things that kind of stymied growth was the lack of really understanding of this administration has created uncertainty. Uncertainty is not good in the M&A markets. You know, people just can't make decisions. It's a kind of— you see that on the capital expenditure side, even for the largest companies in this country.

It's funny you say that because it feels like that's been a theme lately of the uncertainty when the administration is the way it is, the uncertainty it brings, whether it be in energy or in finance. But in taxes, you know, we talked to a gentleman earlier who he loved it. He loved it.

You know, well, his services are needed more in uncertainty because things are changing. And yeah, and he spends a lot of money and resources to figure out what those changes are.

Well, interesting. But I don't know if you're seeing this in your business, but we're seeing so many accounting in finance businesses, particularly accounting services. Right. You know, you don't think it's not the Deloitte and Touche of the world. Obviously, these are the small providers. There's a huge clamor for those. Those are their multiples that used to be 8 to 10. Right now, if you want to buy an accounting services business, it's 15 to 20.

Yeah.

And that has a lot to do with the fact exactly what you said. They're giving tax services and that's ever-changing. What's interesting now is what's happening after the, you know, the big beautiful bill. Healthcare has become another area that people don't know what to expect, especially where Medicaid comes into it. So these tax experts, these healthcare services experts are all— they're in demand right now more than ever.

Yeah.

So I'm curious how you define— the term middle market, lower middle market, upper middle market means different things to different people. So I think of the middle market as sort of being $10 to $100 million of enterprise value. Does that Is that rhyme with your definition or you've got a little different twist on it?

Yeah, I think for the lower, the lower limit, I agree with that. Yeah. So it's, you know, right about that, maybe a little larger, but that's about right.

I'm surprised to hear that banks are now competing with you in that space. I served as chairman of Triumph Bank in Memphis, typical community bank. We wanted 7 ways to collateralize the loan so we couldn't possibly lose money.

Right.

But we were always risk off and So I'm curious, you don't have to name names, but what size banks are these that are now trying to push capital into cash flow loans?

Yeah, I mean, they're certainly the bulge.

Bracket firms coming down into the middle market.

I mean, they're not coming in to the $10 and $50 million loans, but the kind of like call it the $10 to $50 million of EBITDA company. That's where there's a gap for us. That's where the cutoff is. Yeah. And typically the difference also is when you get above $13 to $15 million, but that's where the covenants kind of start getting loosened. Yeah. And so banks, as long as they played at 15 and above, that's fine. Okay. But right now, yes, they're— they'll offer 3.5 turns at, you know, S+375. We just had a deal this morning for a company. I mean, we've seen that for landscaping businesses. I mean, it is— we are at the height of irrationality.

Yeah, that's scary.

That, you know, which is why, you know, from a leadership perspective. Yeah. You know, I have to look my deal team in the face every day. We have at least one, you know, investment committee meeting a day and say no. Yeah. Because these— the spread— we have to have a, you know, an understanding of where these spreads are going. Yeah. Where SOFR is going to level out at. You just can't say yes to every loan and certainly not at these, you know, 3% and 4% loans.

No, absolutely not. You got to stick to your underwriting because that's what's allowed you to create this great business.

So speaking of risk, let's talk about that medevac helicopter. Y'all invested $13 million in a medevac helicopter business that had $4 million in EBITDA. That's almost double— the investment was double what the EBITDA was. Like, was that like 90% of the company, 80% of the company? Like, what does that look like?

So this was like atypical. So the typical deals we do are sponsored. And so these are going to be 4 times levered or less, or we're doing half this capital stack, right? So we'll do the debt in case it's a $40 million deal. Will do $20 million of debt, they'll do the equity. In this type of deal, this is a non-sponsored deal. We did it directly with the owner.

Sponsored, meaning there's a private equity firm, right? That's leading it.

Yeah.

Yeah.

So this company is very interesting. So we gave them a direct loan. It was actually a pretty good deal at the time. So this is a 3 turns of leverage is what we got in at. We didn't have any equity when we started this transaction. And the company actually quickly picked up. And because I kind of said earlier, our patient capital, we were able to provide rescue capital and expertise, heavy expertise. And that's been the same case throughout the life of this loan. But in return for our rescue capital and our kind of sweat equity, we only received 22% of the business. So that $4 million EBITDA company today has a run rate of around $40 million of EBITDA. Oh, wow. So that's a company that we would expect to have a sale. And on a, you know, we have $2 billion in assets. We got about $1.3 billion in market cap. You know, we'll have a $2 million equity position. Actually, we put additional equity over time, but we have $2 million in equity and warrants. You know, we could see, you know, I prefer not to say anything because it's in the market. Yeah, but that can be a multiple. Yeah.

Yes.

Right.

So, so what is rescue capital? Because that sounds like something I would love to have.

Yeah.

Yeah. Well, rescue capital is when they're basically— in this case, it's a lender of last resort. But because we were already in the deal, I mean, these are the ones where their preference— where we have a good sense of who they are. We understand the business model because we just did our diligence on it, which is for us is extremely exhaustive in the lower middle market, different than others. There's no waving in of deals. You know, you go through a really 4 to 6 month process between when you find a deal You screen it to see whether it makes any sense. You go through a 2-month diligence process, you meet the management team, you talk to industry experts, and you go on another month of diligence answering questions before you close. So in this case, we had gone through all that process and we knew that this was a valued business. It just oftentimes in the lower middle market, the business expertise is not all there. And so they need help. Oftentimes that's why they're seeking this capital out there. There's a recognition. So in this case, we felt pretty good. In order to create the success, they needed the capital. And those are the situations where we love, when all you have to do is put capital in to help stem a payroll situation. The rescue capital is when they can't make payroll. And I remember 5 months ago or 5 years ago when they came to us, it was, we can't make payroll this week. And so we sat down, We created a revolving line of credit structure for them to lend to them to help give them— they had to build out a plan, a 13-week plan and a strategy, and they had to hit their marks to be able to draw on the credit facility. But assuming they did hit all their marks, they borrowed our capital, and then they started growing. And then they— this is the kind of company that, because as a matter of fact, they build out bases all over the country. And so it requires cap-ups up front. They have to buy or lease jets. They have to actually build out bases at hospitals. And so it requires a lot of capital upfront. So it's the kind of thing that doesn't create a lot of cash flow until it does. And so right now, all of the different bases are creating significant cash flow, and yet they're still building out. So it's not as much cash flow as you'd expect, but it's got a huge white space. So as soon as you stop spending money, you're going to see the working capital unwind.

So they wouldn't lead with rescue capital, right? They would— they already have a position.

I got excited.

Yeah. There are distressed investors out there. That's not the role they play in the market unless in a rare situation like this, something gets a little underwater.

There would have to be something. We, we, we— I don't think I can recall a single time in the last decade where we actually made a distressed investment. But certainly we support the We had a handful, as every portfolio does, of companies that require capital and hopefully good money after— yeah, after the good money.

So you're publicly traded. So you raise capital in the public markets. You use that capital. You had capital in the business when you took it over. Do you then arbitrage capital? You go borrow money and then make your investments.

Yes. So we do it over various forms. So we started this, we started with a $100 million credit facility. Eventually, some of the other instruments that BDCs have access to, one is called a baby bond, which is just a $25 par. It's a retail instrument that you can raise somewhere between $50 and $100 million. Typically, it's costly. The first deal we did was 6%, which actually today, that's not so bad. Back when, that seemed like it was pretty expensive. We have SBIC capital. So we have through the SBA program, the Small Business Administration, if you're lending to companies that are typically between $3 and $10 million, which happens to be right down the fairway for us, they'll lend you. If you apply and get a license, you get a kind of a proctology exam by the, by the government to get vetted as both of that, you know, your, your backgrounds are safe, but also that you're successful investors. So we were able to— we've had 2 licenses to this point for $350 million that we invest. And that's very— it's very cheap money. It's very long-dated money. So then we've also hit the, you know, the institutional bond market. We have 2 credit facilities. So that first credit facility we started at $100 million is now over $500 million with 12 different banks. And then we have a large credit facility with Deutsche Bank. So sort of You know, the success that— this becomes a lot easier. And I hate to even say that on film, but you had to build out the business. And so the debt size becomes a lot easier. We've been very successful. You know, we are very conservative, Ben. I mean, our assets are only levered 3.4 times. Okay. So debt-to-EBITDA for our businesses and our balance sheets levered less than 1 times. And so that's, you know, fairly conservative, you know, certainly relative to banks that are 10-plus times leverage. So that helps draw in bank lenders as well as institutional investors to want to lend money to us. Yeah. Anyway, on the equity side, you know, we obviously, we used to, you know, we had their secondary offerings, but we use what they call an at-the-market or ATM program where we raise equity through underwriters on a daily basis, which is on a one-off basis. And it was able to raise, you know, $40 to $60 million a quarter. And we use that to sort of balance leverage and liquidity. So, it's very effective. It's the most effective way to do it for our shareholders because a lot of others will go in the market and raise $100 to $200 million of equity and they hold it on their balance sheet. They pay down their credit facility and it's stagnant. For us, we just raise the money as we need it and invest it right into our loans.

The loans that you're doing, are they more short-term, midterm, long-term? Is it no two cats the same type thing?

No, no. First of all, 90% of our balance sheet is first lien assets, and it's the unit tranche, what I described earlier. They're all pretty much 5-year maturity. There's a— there's a case right now. It's kind of— I don't know if you've seen it. 7 years become in vogue. Now, the interesting part about it is 75% of our loans are to companies that do extremely well and they'll refinance us out or the company gets sold within 3 years. So and kind of hate that, right? Because you got to continue to rebuild. Probably another 20% of them that are the C+, B- students that we love. They'll stay in for the full 5 years, and they may actually tack on a few extra years. That's great for a dividend-paying stock. And then you've got your bottom 10% that never leave you that you're trying to nurse to health.

So you have an equity component. It's a small piece. Well, I say it's a small piece. What percent of your portfolio is in equity?

So we've targeted 10% of the total balance sheet in equity. So we've done it from a cost basis. We've actually only done 6%, but from a fair value basis, it's about a little north of 10%. Yeah, because we've had a lot of success and kind of noting earlier, we have one large investment. We actually sold 3 companies in the last 2 quarters for total gains of $44 million. Wow. So very successful.

Yeah.

Look at the size of our balance sheet. So, you know, it's— it is hard for us to actually continue to maintain 10% on the equity side, because our balance sheet's grown, we're able to continually increase the size of our debt check, but the sponsors are pretty tight on equity. You have to beg to get $500,000, $1 million. The area that we're trying to break into is really on the non-sponsored side, where that's more of like a $10 million debt check and a $5 million equity check, and you're the majority owner of the equity. We weren't big enough the last 10 years ago to take on that risk. We needed more debt to grow our dividend. Today we've grown to scale and so we feel like we have the ability to write those larger equity checks. But that's something we're, we're looking to build out right now, working with family offices, just trying to put, you know, hire a BD person who kind of works in the market, can find those investments.

Do you have a niche that you like to play in or like you mentioned landscaping? Like, are you all over the map or is it just, are you numbers-only focused?

I'd say we're definitely not specialists, we're generalists, but with the 150+ sponsors we have, they're, you know, they have expertise in different industries. So the BDC requires, as I noted earlier, it needs you to be granular and diversified. So we don't have any specific, we have some areas that are harder to do. We're in Dallas, Texas. We don't do oil and gas for the most part. I mean, there's just too much volatility with rig count. So we find that to be a— it's not that we won't do it. It's just the bar is a lot higher. Like the one deal we've done had one turn of leverage and it's been a wonderful investment. But I mean, we try to match the capital structure with the inherent risk of the company. So landscaping business, I would tell you, it was an absolute no in the early years. But now you start seeing similar to what Lane just described, you know, a business that's grown, especially if it's got a nice geographic footprint and it's a decent player, we could get comfortable with it. It's, it's again, the leverage will have to match that. We want to see management that's generally speaking, we want managers that are staying on and have rollover equity at the very minimum. If they're going to be moving on, they need to have that follow-on equity. So there's certain parameters. That are important to doing an investment, but there's no hard nos or hard yeses. I mean, I kind of laugh. We're looking at a business today that has a franchise of restaurants, which we never did restaurants. I mean, restaurants are a little bit like if you— the problem with doing a restaurant is if you're wrong, you look really silly. Yeah. This one has some interesting dynamics to it and it's levered properly and it could be something that we haven't made the investment, but we, we'd consider under the right circumstances. What I also would note for you in the lower middle market, different than the middle and upper middle market, is these companies have very strong covenants. So they require leverage covenants. So if it starts at 3.5 turns of leverage, if it gets to 4.25 of leverage, its covenant is broken and we are back at the table. What's going on here? Right. Let's walk through and figure out how this business is working through. If it breaks through that as a fixed charge covenant, which essentially it's an interest and debt coverage metric, which you don't see that in the upper middle market at all, that ensures that they're able to make their interest payment. So we have a number of early warning detections that create the ability for these companies to be back at the table. And the sponsors we work with, we require them to do one of two things. They either need to have equity and they want to need to put junior capital support when companies hiccup, or they need to have deep expertise. Now, coming out of the deal, they have both of them because they're an expert in the field in that industry and they're providing the capital. When things go sideways, you want them to continually maintain that. And if they don't do one or both, you know, we are the senior lender. We have the right to take control of the company, which we have the underwriting ability to do so. And, you know, I can name 2 or 3 investments where we've ended up owning a company that we were the first lien lender and ended up selling for a nice gain. So it's not always the worst-case scenario. It's just that we're not really staffed to own 30 businesses and running them operationally.

Yeah. One of our earlier guests today was talking about how earlier in his career he had borrowed money to invest in oil and gas and oil prices fell dramatically. And I don't think he was aware of it, but he had a covenant— they had a covenant that if oil prices fell below a certain thing. So he was in violation of the covenant. So all markets down, he's getting killed, and the bank comes in and says, you're in violation of your covenants. I think a lot of founder-owner-operators are not necessarily savvy in that regard, and they can find themselves upside down. For you as a lender, I would imagine that the covenants are an incredibly important part of your lending process.

100%. We, we do not— like right now we're having to come down on spread to be competitive in the market. But covenants, that's non-negotiable. But another thing you just said, the reason that sometimes our capital isn't the cheapest but we'll still win the deal is because we have flexible capital and we're willing to work with them. And after 10 years, I still think of us as sort of nascent even 10 years later. But we hear from many like, look, you guys have been here, you've been through COVID, you've been through various cycles. There's track record of working with us, especially the sponsors. And so our capital tends to stand above others, and particularly banks. Banks are— they've got to be significantly inside the cost of capital that we'll provide for them to win because nobody really wants to work with them.

No, absolutely not. You know, the bank's your friend when you don't need money, and they're your enemy when you have any sort of hiccup. I ran a bank. I was chairman. Right. So I understand the game. So tell me about being a public company. Who are— I don't mean who literally, but who are your shareholders?

So it's interesting. If you asked me 10 years ago when we started this, we had 15% in retail, 85% institutional. And that institutional was extremely lumpy. We preferred to have the inverse be true. That's where you get volatility and the higher float. And so 10 years later, as it is, we are 85% retail with 15% institutional. Pretty much every one of the institutional holders that were with us in 2015 who we had to go to and beg for them to stay in the deal and explain the business strategy stayed and they've helped us. And it's pretty amazing if you look at it. At the time of the spin, we were trading around $15 a share. This is actually pretty interesting. In 2015, post-spin, you know, our stock trades around $22.50. We paid nearly $5 in dividends. The company that was spun out, CSW Industrials, currently trades for approximately $200 a share. Wow. So if you stayed in our stock from 2015 today, you've made a 50-something percent return. Yeah. And so Capital Southwest, you know, when we come to town to visit our old shareholders all over the country, It's always a warm smile and a strong handshake.

Any significant holders that light up your phone? It sounds like your earnings are pretty.

Stable, but there's always been 2 to 3 guys that need the quarterly visit in person that have always have ideas and thoughts to share. And, you know, one of them actually our largest shareholder who's in Texas, he's, he's actually shows us deals.

Yeah, that's nice.

Yeah.

I mean, you may know him.

You know, Don Sanders. Sure. Yeah. Wonderful man. I think he's close to 90 and he's still sharp as a whip. We should all hope.

Yeah.

But he's up to Ryan. He's like 20 or something.

I don't know. Ryan's 20? I'll take it. But if this is 20, that's rough. Yeah.

Well, that's great. So you've got good shareholders that are happy. You've made them a lot of money. And one of them sending you deals. That's always a good thing. We had a guest earlier who's an investor in the Texas Stock Exchange. Does that have any play with you or not?

So we've been called about that a few times, actually pretty aggressively. I think we're on the NASDAQ. We're traded on the NASDAQ. We work with them. They help us sort of on the investor outreach side. We've been pretty pretty happy. I'm not really sure of the differentiation yet, to be honest. We've hosted a meeting or two, but I think we're comfortable where we are, but we're not opposed to it. It'll be something we look at after, you know, as we look ahead and see if it ends up being something that's helpful. It's just that most of our shareholders are outside of Texas. You know, BDCs have a kind of a global reach. I mean, not just nationally, you know, it's a tax-preferred structure for sovereign wealth funds. So there's a lot of capital that comes in from the outside. So I think having NASDAQ— When you.

Have a long history there, I should have a better understanding of the value proposition of listing with the Texas Exchange. Of course, it doesn't exist yet. So I'm not really sure what that is. I don't run a public company, so I don't have to worry about that.

Yeah, no. And that's honestly that you're not that far off from where I am because we started this with 30,000 share float on day one, and today we trade over 600,000 shares a day. And I feel like NASDAQ— I'm not making a pitch for NASDAQ, but they're very proactive and always trying to help out and see what kind of value they can provide. So I think we're pretty comfortable with.

Where we're listed today. 2015, did I get that right?

Yeah, that was the spin.

So you're 10 years in and you had a 10-year plan and you've met or exceeded the 10-year plan. Yeah, that's right. So what's the new plan?

Yeah. So look, first and foremost, I think over the next— I look at things probably in a few different ways. There's the 90 days because we're publicly traded, right? Trying to meet the needs of our shareholders today because you're only as good as your next quarter's earnings. For us right now, I'm focused on our base rates. If you're lending money and you're floating rate, you have to be worried about where the Fed is cutting rates. For a lot of banks, that's a pro. For BDCs, that's a con. Most of our liabilities, a lot of them are fixed, and our assets are 100% floating. It's battening down the hatches. This is what I was describing earlier, knowing where our spreads need to be. One thing we are working on, so we want to be able to monetize the name now. When I say that, I mean, in our deals, we see a lot of deals that we fund by ourselves, but we're all conservative. We want to be very granular. So there are deals we see that are somewhere between $35 and $60 million that we're the direct lender, but we can't write the whole check. So either we're bidding with an IOI and losing because oftentimes there's the risk of closing when you have two investment committees. So you're harder to win a deal if you're not just the only lender. The other part is that these these deals sometimes are just too large for us to hold. And so we will have to, one, find another lender. We might actually have to find 2 or 3 lenders, or we may have to look to sell these post-close, which is also from a financial disclosure problem. That was all— it was not always a little messy. So what we're looking to do right now, instead of winning deals today and selling off a portion of those assets and getting no economics for it, so being, we're on a deal, there's a 2% fee, it's S+650, somebody comes in as a partner, they do no work, we cut them a $20 million into the deal, $20 million in it and we get nothing for it. We're looking to do a third-party capital where we create a fund, which a sidecar fund or a joint venture or a portion of the deals we originate will go inside this fund. So now you have a $50 million deal, we put $25 million on balance sheet, we could put $25 into a fund, you put additional leverage in that fund, you mean earn a fee and a carry. And, you know, you have a new equity. We have LPs that you'll go out and raise the money from. So it's— that's an interesting vehicle that a lot of BDCs— yeah, successful BDCs. It's harder in the lower, little lower middle market. I mean, you probably know this very well, but, you know, there's a big company bias. And so harder to raise third-party capital, generally speaking, because the viewpoint is, okay, these companies are small, they're not professional. I'd rather lend to companies that are extremely large. But the big advantage between our companies and the upper middle market is, so our companies only have 3.5 turns of leverage. And if you understand the way most deals get closed in the upper middle market, so these are 5.5 turns of leverage, maybe more, but they have EBITDA adjustments. So they'll have a basket of 30% of unnamed adjustments, so their true EBITDA that they're closing at, it's like 7 times. So these are highly levered companies. And so for us, we think that our structure, right, when you actually look down deep and say, okay, they've got covenants, they're much lower levered. And by and large, because there's less leverage, there's more cash flow coming out of these relative to a large syndicated deal that's going to be $150 to $300 million facility, It's going to be priced only a little tighter right now, which is very interesting, which doesn't make a lot of sense. But their leverage is so much higher and they have no covenants. So the reporting package, you know, they only have— they provide their financials every quarter, every 90 days. And if there's a default because there's no really early warning covenants, they won't know for 120 days. For us, we get our financials for our businesses every 30 days. And so not only do we have a covenant, we're getting the information soon enough for them to call a covenant on themselves and get to the table. All that being said, we have to fight the big company bias, but when people sit at a table with us and understand our business, and over the last 6 months, I've spent a lot of time going around to the BlackRocks and the Blackstones and some of the larger funds and telling the story. There's a lot of interest investing in the organization. Whereas I think that there's been a lack of understanding or transparency on what the lower middle market is and how we lend.

Yeah. Private credit has exploded. I think that may translate into a comment you made earlier about there's some underwriting going on that doesn't make sense to you. And I don't know for a fact, so I guess I'm asking a question rather than making a statement. Is money crowding into your space from the private credit boom?

Yeah.

So the answer is yes. Right now, it tends to be transient. And the reason that is, and specifically today, a lot of these larger players are very interested in growing capital, deploying capital, investing in large numbers. They've come in, some of them, and what they find out is the check sizes are quite small. These are $20 million, $25 million, $35 million, as much as $50 which these, their typical deals are $150 million. So I think that more of the competition that we're seeing today is on the bank side. What I mentioned earlier, it's other SBICs. So people are forming a lot of SBICs, right? And kind of competing against us. And then the companies that are the lenders that are in the middle, middle market have, have dropped down. And I think there's a lot of competition there. But I think they'll also find the same thing that, you know, our bread and butter is 3 to 8. Yeah, there's not nearly as much competition. So we usually are bidding against, you know, 3 to 5 other lenders. I think historically that's probably about where it's been in the last 6 months. You might have seen that grow by 2. And if you venture past 10, from $10 million of EBITDA up to 15, now you're talking about 8 to 12 lenders that are competing against you. And so that's That's more. It probably was 6 to 8 before. I think that my perspective is the long-term perspective. And that's the truth about being— I hadn't even noted earlier, we're an internally managed PEC, which means all of our managers embedded within the organization versus an external. Externals are built to just grow. They're not as focused on growing the entity in and of itself. They just want to put assets to work. And so for us, kind of what we noted earlier, patient capital that's going to be here in the long term. So I feel like in the next 6 to 12 months, I imagine a lot of these players will venture back out.

I don't know if you've read Walker Deibel's book, Buy Then Build. It's a buy then build summit. And you were talking about, you know, the security, the comfort you have in loaning with a much lower multiple of EBITDA business. And If I were Ryan's age, I would go buy a business at a 3, 3.5 multiple and use the leverage that's available in the capital markets. You can certainly screw up a business that size, but you got a lot of margin for error.

I couldn't say it any better.

And if you can buy a business— 50% of startup businesses fail in the first 5 years. And only— I think the number I quoted earlier today, and I may misquote my own self now, something like only 5% of those that survive get to $1 million of revenue. So getting past 5 years and above $1 million of revenue is a tiny, tiny thing. And there are hundreds of thousands, if not millions actually, of businesses that are $1 million to $20 million of revenue that are founder-owned or operator-owned that are going to transact over the next several years because they're my age, right? They're gray-headed people. The average, I think the average, more than 50% of the small businesses in America are owned by people 55 years of age or older. You, I think you referenced that earlier. Yep. That's right. So, you know, the failure rate for venture capital firms and individual investments, now they'll own a portfolio and 2 of them will be a grand slam and 10 of them will fail.

And that's successful to them.

And that's successful to them. Exactly. But if you just go invest in a, you know, as a VC in a business, the failure rate's 50%.

Right.

Um, and you know, and, and for an average $10 million investment, it's staggering, right? How high the failure rate is. But the failure rate for SBA-backed small businesses is 2%.

That's right.

So if, if you buy a small business and you use the leverage that's available to you from the Small Business Administration, although they're making it a little tougher right now to get loans because there's a blip, they relax the rules in COVID. What happens when you relax the rules, right? You, the default rate goes up. But that'll work itself through the system. Capital providers such as yourself, you can go in and buy a business that's beat all the odds, made it 5 years, strong EBITDA. They've put systems, processes, operations, best practices, generally speaking. And even if you did nothing but sort of the old private equity model of just use the cash flow to pay down debt, build equity.

You know, it's 100% right. I mean, to your point earlier, you know, when we look at a credit, we do downside modeling and the downside modeling and our diligence puts it against the great financial crisis. And I would tell you that sometimes I feel like it's overkill because it kills— you know, I'll give you an example. We didn't do any building products for, you know, building new starts in New Orleans, in Nevada. Arizona. Arizona. Exactly. And we missed out for a whole decade. And I can live with that. But when we did our downside modeling, so it's either directly using the portfolio company that we're looking at, their history, if they went through it, or the industry itself. And we look to see how it troughed.

Right.

And if it troughed 75%, there's not a deal to be done. If it troughed 20%, there's a leverage level in which you can underwrite. And if it's 5%, you know, there's, there's a different story there. Yeah. And so we've been able to do deals with these 3.5x leverage knowing what the downside model is going to look like. We don't expect any of these companies to hit the great financial crisis again.

But you know what they can take.

We can take— we do two things with that. When we look at our modeling, it has to both— the enterprise value of the company has to support the debt in the entire 5 years., and it has to have enough cash flow to pay interest for the life of the loan. And so if it can do that under that stress with these leverage levels, we feel pretty good. And it's played itself out. We have one of the lower non-accrual rates. And we don't originate any of our loans, which is something that's pretty big in the market today with PIK, which is payment in kind. So a lot of companies, instead of having you owe me 10% cash, they'll say, you don't owe me any cash at all, you owe me 10% PIK. Every month you owe me 10% that I'm going to tack on to your principal. And then we'll just keep rolling, keeps compounding. We don't do that.

The only time— payday loan, I bet. I mean, I mean, it's just— you.

Just roll that over. If you recognize the reason these PIK, they put PIK is because the company itself can't support itself. Exactly. It needs, you know, a longer runway to be able to pay interest and grow the business. So they're right from the word go. There's a significant amount of rent out of the box.

Yeah. You talked about your capital structure. And so you've got fixed borrowing costs, but variable income on your loans. And one of the more interesting aspects when I served as chairman of Triumph Bank was I sat on the ALCO committee and we had a third party that would shock our portfolio because we had fixed rate deposits, we had variable rate deposits, we had fixed rate loans, we had variable rate loans. We had brokered CDs that, you know, when they come due, that if you're not the highest, you know, rate, they're not going to renew. Of course, actually had gotten to the point— this is in Memphis, Tennessee— every bank published their CD rate in the paper on Sundays. And if you were 20 basis points over the other banks, you'd have a line out your door on Monday morning. But, you know, to manage the bank effectively, you had to understand, well, what happens if if rates go up this much, this fast? What happens if they go down this much, this fast? Well, my borrowing costs may go down, but you know, it may, it may hit me over here, you know, on the, on the lending side. And so we were constantly stress testing the portfolio to say what happens, what happens, what happens. I've seen a lot of business plans. I've never seen a pro forma that didn't see, you know, 5% compound annual growth, right?

Right.

It's never— I think one of the mistakes mistakes that a lot of buyers of businesses do is they don't look at the downside. They don't measure, well, how much of a decline could I have in EBITDA after I buy this business? And how does that work? What's the SBA loaning out? They're looking for a 2-to-1 debt service coverage ratio, something like that. So you need to really understand, and you need to understand the business well enough to say, well, what could happen?

To, to— but we do that. Look, you know, it's funny you say, because we, we don't even talk about the base case in our investment committee meetings. Yeah, we at the very end, we start talking about what's the equity story. Yeah. And generally, if you're going to like the credit story, you'll probably like the equity story. Not necessarily. So, I mean, two-thirds of our company, we have equity. And so on that, probably 50% of the time we didn't get it and 50% we didn't want it. But your point is we're a lender. We're very focused upon that to make sure that we can continue to pay our dividend. Our shareholders on the institution, on the retail side, is mostly older investors that this dividend is paying their retirement. This is a pension fund for them, if you will. We're very cognizant of protecting their capital and continuing to maintain their dividend.

I've been extremely quiet this whole conversation. One, Lane eats this stuff up. 2, like, as a small business, like, I've had very bad luck when it comes to lending. Like, all— every single type of loan other than private has been extremely high interest and extremely short turnaround, and it's crippling. So, like, what advice would you have to the, like, hundreds of thousands of small businesses out there struggle with, because I get it, the SBA there is there to help you, the SBIC, all these different programs are there to help you, but yet they don't. Like, and maybe it's just because my business is not strong, I don't know, but we're 5 years in, we're still here. So it's like, it's, it's how do you balance like, hey, you don't look good on paper, but yet you're somehow you're still here.

I think, you know, at Lane and you kind of laid out the aspects of what you, you know, how you need to look in order to have a, you know, an M&A transaction. You know, part of that's going to be scale. There's no question about that. You know, you have to have positive cash flow, right? You're going to have to have a bench strength, right? You can't be the only person like we, we won't lend to a company that has a sole proprietor and nothing underneath it. It has to— we want to meet the management team and know that if this person gets hit by a bus, that there's something underneath it. We don't want to see customer concentrations. We don't want to see supplier concentrations. So I mean, those are sort of the universal factors that sort of separate a company from being something we can lend to versus one where we couldn't. I mean, also, I think you mentioned earlier having financials, having a controller. Sometimes these companies don't have a CFO. They have a glorified controller. But that's still important. We need to know that the quality of the earnings, the accuracy in the financial statements are right. And so then you need to have a 3 to 5-year plan. From our Treasury Department, we send out checks for $75 and $100 million to founders. And I got to tell you, it tickles me every time I do it because I think it's amazing. People that go out there and risk their lives to build businesses. I think there's other people in the world who are envious. For me, it's like the happy— I have a happy day. Every time I go home, I tell my wife, like, you know, this guy just made $100 million doing plumbing supplies. I mean, it's awesome.

He worked his fanny off for 30 years too.

But you know what? But I also say that the things we just discussed, there is a definite game plan to creating a business that will have private equity interested in growing your business. And it's all of those sort of staples that I just mentioned. Those are foundational. Without those, it becomes more difficult. And certainly, I mean, I think bench strength above all else, you can't be counting on one person to be the success story because you may not be there or it also has a reason to exist. For us, every business we look at, we don't do deals that are commodity businesses. These businesses have to either be a small player in a big pond or a big player in a smaller pond that has great market share and absolute reason to exist.

You're in that awkward spot where you're young, your business is young, you're the business. Basically, these gentlemen and lady are exceptional at what they do. But basically, if you get hit by the bus, there isn't a Harper Belmont the next day. And so you're in that spot where you've got to get past 5 years and have systems and processes that are repeatable. And if you get hit by the bus, there's still a business that can open the doors the next day and run. Now, there are 28 million businesses that look just like you, right? And I think your point is, why isn't there more capital available to the 28 million of us that are small.

Businesses that present the way you do? And this thing is like, I think there's 33 million total businesses and something like that. Yeah. And only 5 million or less have more than 2 employees. So already the numbers I may be wrong on, but it's pretty close. Yeah. But that came from like the Goldman Sachs program. So it's like just by having employees, you are already, you know, percentage-wise in the top percentile as far as businesses go.

Well, at the small-ish level, lower than what we see, it's kind of tough to get anything but an asset-backed loan from the bank, right? From a regional bank. I mean, if I'm out there not doing what I do today, what I see and what I see a lot of successful business owners doing is these roll-up strategies. Coming off of COVID what people noticed were there were hell of a lot more pets on the street. Right. So what did you see? You saw roll-ups of veterinarian practices like wild. You couldn't buy one. Like we wanted to lend into them, but we missed. We swung and missed at least 30 times because you just couldn't get into those deals. Yeah, we've seen them now in medical practices, businesses. You see it with orthopedics or dentists or we're seeing it in psychiatric practices. Yeah. So, the notion there is if you can get capital, I know this is the chicken or the egg to start rolling it up and trying to build scale, that becomes very interesting very quickly.

So, this may be out of scope of your expertise, but just, I love the story even though it's so painful is the Red Lobster. This company has been around for a ton of years, everybody loved it. PE firm came in, stripped the real estate away, and then all of a sudden the restaurant can't afford the lease. And then they go under and it's on one end.

They did give away shrimp for a.

Long time before that. The endless shrimp, endless summer shrimp.

Yeah.

Yeah.

Well, again, that was one of the whole details.

That's a perfect toxic brew of bad decision-making by private equity.

All I'm saying is from the outside looking in, it looked like the PE firm came and killed that business. And the only reason I'm mad is the biscuits. Like, I don't really like— I don't.

Like lobster that much.

I've heard that a few times. It's just the biscuits.

I mean, look, that gets to the place like, you know, you— good, sound, long-term thinking management is— you can't replace it. I mean, that coupled with, you know, I got to tell you, you know, being CEO now, I spend probably 50% of my time thinking about how to make everyone else happy within my organization. The other 50% is strategic. But the people that work for me, that work with me, I mean, they're the lifeblood of the company. The hardest thing right now in any business is retaining people. And especially millennials are a different breed, right? Young talent, you can hold the line and not offer work-from-home Fridays or whatever kind of flexibility they're looking for. But eventually you have to bend because you have to meet the moment. But you talk about like, those were bad strategic decisions. But I see companies that fail all the time because they're not well run and they don't value their employees. And so they don't maintain what makes them successful. I came from a background with a different company, like I told you earlier where I started. That company grew quickly and I have a lot of good things to say, but I will say the company eventually failed. It was sold, but it wasn't because it didn't invest well. It was because management made some very ill-advised decisions that weren't employee-focused. They probably wasn't long-term value-focused. A lot of people end up paying the consequences.

Financial engineering as opposed to connecting with the customer. I just finished reading King Carl, a biography of Carl Icahn. And I mean, he's been obviously a very successful investor. But he focused on financial engineering. It wasn't, how do I empower the people? How do I give a better customer experience? I mean, he bought TWA. And he's hammering the unions for 40% cuts. The pilots are unhappy. The stewardesses are unhappy. The cabins are dirty. The customers are getting mad. You know, you just can't financial engineer your way into happy customers. I was up in Fayetteville, Arkansas yesterday meeting with a client, and I told the story about meeting Sam Walton when I was about 12 years old. Walton had opened a Walmart in Columbus, Mississippi, and that's where my uncle lived. And he taught me how to shoot skeet, clay pigeons, with a.410 shotgun. A.410 shotgun, it's like shooting a clay pigeon with a.22 rifle. And he choked it down so that the spray was very concentrated. So it's really hard. But, but by learning to shoot clay pigeons with that type of gun, you had to be a marksman. Nobody had.410 shotgun shells. I mean, they didn't sell them because everybody had a 20-gauge or a 12-gauge. So one Saturday we were going to go shoot skeet and he said, I don't have any shells and the sporting goods store is closed. Let's go to this new store down the street. So we go into Walmart on a Saturday afternoon, Columbus, Mississippi. They got a grand opening banner. Didn't mean anything to me. This is 50-something years ago. And we go in, we go back to the sporting goods section, 410 shotgun shells, don't have any, thanks. We walk out the front door empty-handed. Guy comes literally running out into the parking lot after us. You know, gentlemen, I saw that you came in and you left empty-handed. What did you come to buy today? We came to get 410 shotgun shells. We didn't have any. No, sir. He said, my name's— I didn't remember. My uncle had to remind me. I'm 12 years old, right? Said, my name's Sam Walton. This is my store. When you come back, we'll have.410 shotgun shells. So here's a guy who, you know, he built the greatest retail fortune probably in history. And on a Saturday afternoon in Podunk— sorry, Columbus, you know, at the time, you know, small town Mississippi— is chasing people out to their car in the parking lot to find out why they didn't buy something. Now, now, people have good and bad opinions of Walmart and what Sam Walton built, but But what I will say is regardless of any opinion you may have, he was an obsessed business operator who was focused on the customer experience. And when I see private equity come in and fail, one, it gives all private equity a bad name, right? And I deal with that every day when I talk to lower middle market business owners who want to sell and they go, oh, private equity. Well, they're going to come in and fire everybody. Why would they fire everybody? They don't want to fire everybody because then they'd have to hire all new people. And the business they thought they bought doesn't exist anymore. They're more worried about people walking out the door when they write the check than you are about them firing people.

I think that, by the way, if I look at that notion relative to the sponsors and the private equity we're working with, if anything, they're trying to add to the story. Typically, the companies that we're dealing with, have one marketing person or no marketing person versus 3 to 5. So they're not— the initial strategy is to look at what they are and sort of exacerbate all of the positives, right? Relative to just like ripping things out or cutting costs. That's the last thing that they look to do. I mean, look, there'll be rifts if and when things do not play out, but it's not before they go through growth strategy and kind of what you're talking about, Sam, as well. I just want to back on that. Look, I see this every day and I've seen this through my entire career. There are people that are very transactional and I've seen this almost, I feel like in a 20-year timeframe, things usually play itself out. If you're transactional in the way you deal with people, either employees or banks or lenders or private equity, the first chance they get to turn their back on you, they will do it. I have to say, you know, for— I have a sincere approach to, you know, building relationships. It kind of helped me. Look, I came from a large shop in Bethesda, Maryland, doing that deal, mostly bulge bracket firms, because it was very large. And when I came here to Dallas, come, you know, starting from scratch, the lenders that I knew there came with me because of my relationships with them, right? And because I always treated them fairly, because I never would scrape the last basis point, the last dollar. Right. I was always like, you know, we always try to— I make sure that that's how I focus on things. Yeah. Since I've taken over, I've been very focused on doing employee satisfaction surveys. Spent a lot of time. It sounds kind of corny, but I walk around the office and I just go into people's offices just trying to talk to them, find out about what's going on in their lives. Yeah. Trying to make sure that they understand that I'm here, you know, and approachable. Right. That's— there's a lot of different ways. And I think our deal guys make a lot of trips to our sponsors on a weekly basis. And they're, they're not always asking for deals. There's something just— I mean, they're coming in. There's an understanding of that's why we're here. Right. But they're building relationships, which is why I think we win. Kind of what you were talking about, the private equity on the larger side is much more cutthroat because they're buying larger companies and they're going to cut off this division and they're going to get rid of this executive team. And they're going to rip things out. That's not what this sandbox looks like.

They've been doing that since Pretty Woman. Yeah, exactly. So what's interesting about your team going out and visiting, this has come up today, it's come up before, but with technology, Zoom, and now AI, it's like even harder and harder to determine, am I actually talking to Michael? Is that really Lane? Are we AI right now? Is this real? And so that face-to-face, you know, is going to have a roaring comeback or probably already has. And like people like, hey, I'm— well, Brent talked about this morning about he's flying to Ontario tomorrow for a potential deal. Now he's probably doing that. That could be a Zoom call, a phone call, but that in-person, you can't You can't do better than that.

Yeah. And I feel like from what everyone has gone through, I hear that more than ever. So my CFO and I just got off the road for the last 6 weeks across the country meeting investors. And we're also, you know, some institutional investors for potential deals, kind of a non-deal roadshow. And every single person that got there, one, said, so great to have people in person. But they also said, Listen, we're asking these people for $50, $100 million to put into a potential transaction, that transaction. They're like, you've really cut out steps here by meeting us in person. It checks the boxes for— because these are analysts that bring it to their PM to make these investment decisions. So I think that one, they're happy to see you, they're happy to talk to you, but they're also— it's even internally in these in these organizations, they view it as a much stronger way to do diligence and move a transaction along.

No doubt about it. Troy was saying earlier, one of our earlier guests, that he flew to Buffalo to meet with an investor group who said, we're interested in investing, but we need to meet you in person. And he got on a plane and flew to Buffalo, New York, hopefully not in the winter. I think the in-person thing is still big. I started a community bank gosh, I don't know, you know, 18 years ago, but when everybody said, well, you can't start a community bank because the big banks will just kill you. And what we learned was people actually want to have a relationship with their community banker. My wife still goes into the Wells Fargo branch. And the funny thing is they keep closing branches. I think she's going to have to drive to Plano eventually to find a Wells Fargo branch. But she actually wants to go in and ask them. She's the one person that won't look on her phone and figure out what her bank balance is, but I still think that people want to have relationships. I do a lot of my work by Zoom, but we were up, Andy and I were each up in Fayetteville yesterday meeting with the client, meeting with the prospective buyer. And you know, it's great because at the end of the meeting, the client said, I can't believe both of you came up here for the day. Well, you know, we're going to get a deal done as a result of that, right? And a good deal for the seller. It's self-interest, obviously, because we're going to get paid a commission, but He's right. We didn't have to both come up there and spend a day, but doing it allowed us to connect with the buyer, connect with the seller. I think there's tremendous value in that.

I like to think that it's leveling out to the place where Zoom is now going to be a supplement and not the primary, because there's times where you just can't get there. Yeah. And, you know, we just had a trip that got canceled. I was supposed to go to Toronto last week, and obviously I hadn't been in Canada in a number of years and the strike happened.

That's right. The Air Canada strike.

I know. I was like, I couldn't believe the luck. So we ended up having to convert. But on a dime, Monday morning, we converted 8 meetings to Zoom. And we had our calls and, you know, we all agreed we'd get together the next chance we got.

But it should be the second choice, not the first choice. I like going and visiting with people in person.

And I think they value that. I'm such a people person that I like that as well. But at the same time, There's also that, hey, this meeting, 30-minute drive, an hour meeting, 30-minute drive back. I just lost 2 hours. The meeting was worthless. Well, what a waste of time. This could have been a 5-minute email.

Those are judgment calls. I agree with that. Those are judgment calls. But you know what? If it's worth it and there's enough at stake, that person understands that you're getting in your car. You're getting up early. You're driving to to make that happen. I mentioned on a previous podcast that, you know, I think it's a generational thing because I have two 30-something-year-old daughters and I was talking to them about making phone calls to people and they were like, you can't do that. Are they expecting your call? And I went, no. And they went, you just can't call somebody. And my son said, what do you mean? You can't just go. No, that's rude.

It's rude.

They call, so you text them first.

Or people think that text messages— I look at text messages like email.

Emails.

Like, if you text me, that doesn't mean I have to text you back immediately.

So the work from home, there are people that rise to that occasion are perfectly fine in that environment. But those that aren't socializing, Jamie Dimon talks about the value of meeting at the water cooler and exchanging ideas and information.

You lose that. I think 100%. And I think that at higher levels, like for us, If you have a business development person who brings in deals, that's on the phone all day long, just calling on sponsors or calling on businesses, of course, that's going to be fine. But if you're an associate with 2 years who's trying to learn how to put together an investment committee memo and not being in the office to bounce these ideas against other associates, what are you doing? Or going and talking to the VP or the principal? Or just understand the hierarchical infrastructure. The hardest part is, and it's only happened on a few instances, when you meet somebody that hadn't worked in an office that just has no idea how to work within a corporation. That's like, and it makes you feel a little bit like, how do you, that's a tough one to address.

Well, also there's the just work in general. Like what is actual work? Because if you have a summer internship over here or you work for your uncle over there and you get a quote unquote real job, depending on what that— the expectations are, it may be out of left field. Um, case in point, a buddy of mine who's in the, uh, Executive MBA program at SMU, like, he owns, I think, 5 or 7, uh, med spas. You know, the, all the things.

That's big right now. Yeah, you've seen it too. Yeah, huge. We're trying to win a few— 2 deals now.

We'll see if— well, I mean, I think, I think my guy's looking exit, so I'll put you in touch. But he was saying his expectations for his managers are on top of just running the store, they also have to do at least 100 outbound phone calls. And I heard that and I'm like, that's a ton. That's a lot. And he's like, so, you know, because that's the expectation of that job. But he also, you know, when his employees hit $1 million in sales, they get like a really nice watch. So he takes care of his team. And, but my point to bring that up is one, it dovetails into the pick up the phone and call, but two, the limiting belief of expectations of what a team member can do. You know, and in his case, it's like, yes, you need to run the store. You need to keep it clean. You need to welcome the guests, but you also need to bring in people and do sales and do 100 outbound.

Calls every single day. Depends on the nature of the job. But, but I would go back to my original comment, which is I think junior people need to be in an office. They need to learn how to work. They need to know, you know, how to interact. I mean, that's just sort of an essential part of, you know, growing. I mean, unless you're going to be an entrepreneur, sole proprietor, and even such, eventually you're going to have people working for you and you should understand how that might look.

Absolutely. Yeah. Well, we're getting close to the end.

Yeah.

You know, it's been a fun conversation.

It's been a lot. You know, when it comes to money and just watching y'all two go back and forth.

Well, we, again, we're kindred spirits because we're dealing in the, you know, with the common business owner talk.

Yeah.

I felt I was watching two people speak a different language.

I hope I wasn't too off.

No, no, no. The audience will get it as I won't.

Yeah, every industry has its lingo, but I like what Michael's doing. I don't talk to a lot of people that are in the same space, but it's a valuable service they're providing, providing capital to these founder-owner-operator, you know, lower middle market, middle market businesses. Can really, as you said, be the kind of thing you go home and tell your wife about because you you.

Really helped change someone's life. Yeah, I mean, that's exactly how I feel. When I was younger, I was younger and I worked the first time around on the first company, I started very young there. I always thought, well, this is philanthropic. That's what I always felt like, because I was like, we're giving money to all these companies that can't get money.

Where's my card?

Yeah, I was really— I used to walk around exactly there. I'm so proud of what I was doing. And I haven't really lost sight of that. I mean, that's what I said every time. I always like to know when we're going to fund a check because it's a good story. It's not like we— we do probably 25 to 30 new companies a year. We do lots of add-ons along the way. But that means there's like 25 or 30 individuals that are becoming millionaires. And that's pretty— sweat equity. And honestly, it's wonderful. These are success stories for generations.

Well, Michael, you've been a treat to have on, on the podcast. We appreciate your time and energy today. We look forward to following you and, and your business, seeing how, uh, the next 10 to 15 years plays out. Sounds like you've got a lot of.

Opportunity ahead of you. I think so. I appreciate you having me today.

Yeah. Thank.

You so much.