How legacy-conscious business owners turn to this special trust
Perpetual trusts can support a corporate asset or cause long after the owner is gone
By Bob Chiarito
After running Walker Group, a digital consulting firm in Farmington, Connecticut, for 32 years, founder Kate Emery was looking to retire and focus on her art. It was 2018, and Emery, then 60, had spent decades growing her company to 50 employees with annual revenue of around $10 million.
However, even if she could bank millions, the sale did not please her. For years, she has studied pathways to social entrepreneurship. Then, in 2018, Emery discovered a little-used corporate structure, the Perpetual Purpose Trust (PPT), which ensured that his company values would remain in place long after he retired.
Specifically, Emery heard of an organization called Purpose Foundation, which aims to shift the focus of capitalism from maximizing profits and shareholder value to a larger purpose, which was appealing to Emery because, in his mind, a TPP would cement his legacy.
“I think there are people who are like me, who want to make something meaningful out of their life’s work beyond what it does as a source of income,” Emery said. “You spend a lot of time building your business and now you’re like, ‘Where do I go from here?’ and your legacy.
Unlike most trusts, a PPT is a non-charitable trust that is established for the benefit of a purpose rather than a person. For many companies, goals include sharing profits with workers; the protection of the environment; hire people at risk, such as employees with criminal records; and prevent future owners from abandoning higher profit targets.
In the case of Walker Group, the PPT says one-third of the company’s profits will go directly to its employees.
“Employees love it because of it and because they know it won’t just be sold to the highest bidder and scrapped for parts,” Emery said.
With more and more companies focusing on ESG issues, a PPT is the ultimate way for a company to put its actions where its hypothetical mouth is, according to Aner Ben-Ami, Managing Director of Candide Group, a company investment advisory firm dedicated to diverting capital from an extractive global economy into investments dedicated to social justice and sustainability.
Ben-Ami said that while PPTs have only been used by a very small portion of companies, it is something that is growing, especially with companies that have tried to implement employee share ownership plans. , known as ESOPs.
The new ESOP
“ESOPs are a well-known entity, which is a small cottage industry, but it really hasn’t grown beyond that,” Ben-Ami said. “The reasons for this are that we see founders who don’t see solutions in ESOPs. With this, I certainly hope it will expand the market.
Purpose Foundation co-founder Derek Razo said the market for PPTs is diverse, both in terms of industry and the size of the companies implementing them.
“I go from creating them for $5-10 million to being a $500 million tech company. It’s wild,” Razo said.
For Emery, being the sole shareholder of Walker Group made it easier, but Ben-Ami said companies with many board members and owners created them.
He cited the example of Organically Grown, an organic produce distributor based in Eugene, Oregon.
“Organically Grown is a $170 million company with many shareholders,” Ben-Ami said. “In their case, they identified five stakeholder groups in the trust documents. There were the workers, the investors, the suppliers, their customers and then the community organizations that promote organic practices.
While some business owners who choose to sell their shares to PPTs walk away with less money than if they had sold to a private equity firm, they often get the market price, Razo said.
“We always try to get what works for the company and its stakeholders. A lot of times it’s something close to the market, but maybe the owner is pulling out some of their cash so their employees can benefit,” Razo said.
Emery likened it to a “financial poison pill” – but did it “on purpose”.
Minimal crossover with private equity
Razo doesn’t think PPTs reduce private equity investments because of the type of people who set them up.
“A lot of these people wouldn’t sell otherwise. I don’t think we’re really competing with the private equity firms because before they even talked to us they ruled out selling to PE,” Razo said.
Ben-Ami said he works with a few investment banks and private equity firms that are dedicated to ESG issues, but conceded that PPTs scare some people off.
“Banks are certainly becoming impact investors in many ways, whether it’s clean energy commitments or ESG commitments, certain job quality standards or diversity policies,” Ben-Ami said. “That vision is just steps away because it takes away some of the power that investors have.”
He added that for venture capitalists, perpetual trusts are a “non-starter” because they take the exit off the table.
Attract traditional investors
Ben-Ami said one way to attract traditional investors, including private equity firms, family offices and pension funds, is to create a multi-company fund with PPTs.
“Ultimately, the idea would be to create a holding company, Berkshire Hathaway-style, that owns a lot of these companies that are good companies and serve their stakeholders,” Ben-Ami said. “Once you have an entity like that, will these companies attract traditional investors? Damn, yes.”
“Owners value legacy and longevity more than anyone else in today’s private equity market,” Razo said.
Bob Chiarito covers consumer mergers and acquisitions for Mergermarket. He is based in Chicago and can be reached at [email protected].