Episode Transcript
DAVID: My name is David York. I'm an attorney at CPA in Salt Lake City, Utah, and also a Dean with the Purposeful Planning Institute. And it is my great pleasure to introduce and to talk today with Natalie Reitman-White. She is a principal at Purpose Owned, Natalie is a leader and change maker nationally recognized for her work on transformative ownership and investment models. She has over two decades of experience as an executive in the food sector, developing and leading strategic initiatives in sustainable business, trade advocacy, organizational development, governance and human resources. In 2018 she pioneered one of the first in the nation, perpetual purpose trust ownership transitions with organically grown company. Following that, she co-founded and spent five years at alternative ownership advisors, specializing in ownership, and governance design. She's a sought after educator and consultant helping dozens of companies to help explore and implement tailored ownership and financial solutions to help them stay independent and mission driven into the future. And I'll just say I've gotten the pleasure of getting to know her this year and share a lot of her ideas and notions on this, and so I've been really looking forward to having this conversation. So thanks for joining us, Natalie.
NATALIE: Thanks for having me. David.
DAVID: Yeah. So tell me just Just briefly, just a little bit of your background in the organic food sector and how you went from organic food to purpose trust?
NATALIE: Sure. Well, like a lot of people, my career journey has not been exactly what I expected. So I got into working in the food sector in the early 2000s and what I was really passionate about was, how do we use entrepreneurship as a tool and a lever for change? So I was particularly interested in working in the food system to turn on more eaters and more farmers to healthy food options. And so really interested in how we grow businesses to reduce their use of toxic chemicals and create more whole foods options for people that would be affordable, that would be available on every shelf at the grocery store, and where farmers could make a living doing it. So really, using the engine of entrepreneurship and business to create solutions for people and improve the health in their lives. And so I focused on that for many years. And what I saw was I was part of this tremendous growth of, kind of the organic and natural food sector, which was very exciting. When I first started going to some of these trade shows, they were a few thousand people. And by the time I was kind of an executive and board member in the trade we were having trade shows of 80,000 people, 100,000 people, had become a very hot industry. And what I saw was I was friends with a lot of founders who were growing their companies very quickly, taking on investors, going through kind of acquisitions and consolidations, and what I found was there was a lot of anxiety about ownership. They were not anxious about their businesses. They were passionate about their products and their services and how they were serving their customers and how they were dealing with their supply chains and their employees, but they needed to bring on investors and transition their ownership. They needed liquidity out of their businesses, and they had a lot of anxiety about whether the new owners would carry on those values that they built their businesses with. And unfortunately I asked, I also saw a lot of kind of remorse when someone would exit their business and things would change. They would move production, they would change the formulations, they would change the supply chain relationships, and they felt a lot of stewardship and care for what they built and the people that depended on. Them and their businesses, and so they were looking for solutions that would ensure the continuity of the way their businesses had operated. And that's where I came across the perpetual purpose trust as a potential solution for ownership for companies. I was on the board and the executive team of one of the largest distributors of organic fruits and vegetables, hundreds of millions of pounds of food we distributed every year. And I was looking for an ownership succession solution for that company. I was leading a project on that, and we developed this novel solution with the help of a great legal team from Stoll Reeves.
DAVID: That's awesome. So yeah, maybe tell me just a little bit about specifically the transition for organically grown to a perpetual purpose trust, what was kind of their motivation, specifically, and then what were maybe some of the challenges you faced?
NATALIE: Sure. We were in a rapidly growing industry, or our valuation was going up and up. We had founders who had founded the company 40 years before, who were ready for retirement. They were ready for some liquidity of their ownership value, but they wanted to make sure that the company continued on in the way it had been operating. And so kind of the first route they went was to sell the company to the employees. So we had set up this employee stock ownership plan. We had a few, over 300 employees participating, and what we found over time was there were some challenges with that. We had a rapidly growing workforce, a lot of young people in the workforce, and they weren't necessarily interested in owning the company. They wanted to have great jobs, great benefits. But they were interested in kind of coming and going over time, warehouses, truck drivers and others and so this notion of kind of long term ownership that was part of their compensation, that they would get to cash in someday when they retired. For a young person who's 25 that doesn't seem super relevant at the moment. Also, the plan was pretty administratively burdensome and expensive. I remember talking to our CFO, and she said, “Well, you know, we used to be in the produce business, but now we're in the stock buyback business, because we have to buy back all the stock from our founders, but then every time an employee leaves and new employees join, we're buying back the stock and transferring it to the next person.” So we're kind of on this, what she described as a stock buyback treadmill, of constantly creating liquidity for folks who are leaving and giving ownership to new folks. And so what that can do for a business is it can distract the business from really focusing on its strategy, its products, its service delivery, and you're constantly dealing with this kind of transition of ownership and managing the financial burden of that, annual valuations, audits of your plan. And so we were looking for an ownership solution that would be less distracting, that would basically give us a permanent owner, that would allow us to focus on the business for the long term, and running a great business, rewarding our employees well as we went, and that's how we came across the purpose trust, which is basically we bought back the ownership and from the employee stock ownership plan and the existing founders, and now we have a permanent owner that is a trust that will never die, never retire, so never need liquidity, and can ensure that the board of directors and the management focus on delivering results over time to the purpose, which is promoting sustainable agriculture through the products that the business provides. And yes, we had the burden of kind of doing that one buyout of the owners, but now we have paid off that buyout, that fair market value, and now we're owned basically free and clear by this trust. So it's a steward owner, meaning that it'll never need to liquidate. It can hold the company forever, and it allows us to basically take the profits of the company, reinvest them in the company, and share them with the people creating the value on an annual basis through profit sharing, community donations and the like that further the purpose. So it's actually a very strategic model for a business, as it allows it to use a lot of the proceeds to really accelerate its growth and development over time, versus kind of having a lot of value go out of the business constantly to owners.
DAVID: Yeah, okay, that's awesome. So we've used this term before, and I think you've kind of loosely described it, but for listeners who aren't familiar with the term, can you kind of describe a purpose trust in its in its broad sense, especially how that might differ from traditional business ownership?
NATALIE: Sure. So with the purpose trust, you're basically transferring the ownership of shares from shareholders, who are usually individuals and people into a trust. What is unique about a purpose trust is it's a non-charitable trust. So you have a for profit business, it's still a for profit business operating, selling services and products and making money doing that. But what is unique about a purpose trust is that the only beneficiary of a purpose trust is a purpose that the founders or the shareholders who transfer their shares into that trust decide. So you have a for profit business, and you have a shareholder that's not interested in maximizing its own value. It's interested in ensuring the company continues to operate and benefit a purpose. So a lot of people think, “Well, what do you mean a company benefiting a purpose? That sounds a little a little out there?” Well, in fact, there are a lot of business owners who operate their business for many purposes, beyond just shareholder maximization. There are a lot of what I call steward owners and businesses where, yes, they want to make a living and they want to create value, get some distributions from their business, but they also care about a constellation of other things. They care about being a great employer and really taking care of their employees and giving them a good quality of life and family benefits and the like. They care about, being a responsible corporate citizen and their community and being a model business of how to do business right, giving back to the community. They care about those relationships they've built over the years with their customers and their suppliers, and really giving them the best service possible. And so there's often a purpose behind a business that is about beyond just maximizing value for an owner to cash in on the business. It's about sustaining, kind of the value it creates every day through what it does. And so that's what we're talking about, enshrining in the purpose trust, so that the owner can get liquidity by selling their shares back to the company or or donating their shares, or some sort of hybrid. And then they get their liquidity out, but now they ensure that that purpose carries on through the trust as the new owner.
DAVID: Yeah, and I love that. I agree. And I think you probably noticed this as well over the years. I'm seeing an increasing number of business owners who not simply want to do well, they want to do good, and they don't see those as mutually exclusive. And many of the clients I work with and talk with on purpose trust, they see a for profit business that performs and provides goods and services and hires employees and pays good benefits and taxes. And you know that that is one of the highest forms of civic good that we can do. And I like what you said earlier, that enterprise, that free market, can be a tremendous forum for doing good and doing well in the world. So yeah, that's fantastic. So one of the things that you and I have talked about before is it's so important to articulate that purpose and have clarity on that, but it's also important to make sure that that's instilled in the operations of the business itself. A 50-page trust that's got a clear articulation of purpose may not in and of itself, allow that company to be successful. But what are some of the things that you do on the operational side or the business side to help align both the concept of the purpose trust with the company, both at maybe a leadership level, but even all the way through to rank and file employees?
NATALIE: Great question. So you're right, an ownership transition isn't just the mechanics of transferring the shares. There's a lot of components that you need to think about with the ownership transition if you want the business to carry on with that legacy and those values continuing past the owner leaving. So what I work on as an ownership design consultant is really a holistic solution of helping the exiting owners think through how they're going to set up the company to survive and thrive into the future with the purpose trust being the owner. So there's four components that I look at that the structure needs to support and reinforce. The first is that why. So the mission around why the company exists, who it exists to serve the value it wants to create in the world, and having that clarity of purpose. Businesses need to be able to evolve and change their product and service mix over time, but they need to have that clarity around the why. So I can give you an example. I worked with a company, Vernier Science Education, and their Why was they felt that creating hands-on tools for teaching science in the classroom was a much better way of teaching science. Kids could read about it in a book, but if they actually had experimental tools and things that they could put their hands on in the classroom, they would get more into science and be more passionate about science. And this company was started by science teachers who were passionate in thinking science literacy was one of the foundations for a healthy economy and society. So, they got into it doing these hands-on tools well over time, the company's been in business for 40 years now, they've developed all sorts of online educational modules and things using computer technology that didn't exist when the company started. So the company needs to be able to evolve its product and service mix, but their why has stayed the same, which is all of our products. Everything we do should be about promoting science literacy in the classroom and giving teachers the best tools that they can have. So first getting clear on that why and that purpose that you want to sustain for others, it's you know less about, just their products and services, but maybe their Why is simply about being a great employer. I've been working with a landscaping company that is quite large, and their Why is really about providing a great quality of life to their employees and their families. And their products and services could evolve over time. They're providing a service to their customers. They're passionate about that, but it's really about the people and treating them with respect and dignity and providing good, good family life. So first getting clear on the why. The second area is really doing that people and culture leadership succession planning. You really want to make sure that you build up a leadership team of people who are passionate about that why, and that you are rewarding them so that they will stay with the company and continue to deliver in that way. So really thinking through the people and leadership, succession planning and getting that alignment, those are both what I consider kind of the heart of the business. Then you also have to think about the head of the business. So there's two other components I help folks think through, which is kind of their business strategy, how the marketplace is changing, what is their competitive game plan to stay healthy and successful into the future? Will they need capital to do that? Will they need to substantially change over time? And we want to make sure that when they do this ownership transition, they don't tie their hands from the kind of growth and capital they need to be able to sustain the business strategy. So sometimes we'll pair a purpose trust that'll keep that mission together with investors who can help the company grow, or other kinds of vehicles to ensure that the business strategy will carry on. The business can acquire other companies, etc. So that's another component. And then the other kind of head component is financial management. It's great to put the company in a purpose trust, but we also need to not only provide for the owner's legacy. We need to provide for their financial needs. So really planning out what do the outgoing owners need for their retirement, for their families, as there's some kind of ongoing component of family ownership that stays in alongside the purpose trust to provide for future generations. So really thinking through the financial modeling of the ownership transition and the ongoing financial needs of the business to be able to reinvest back into itself, to stay healthy and also reward stakeholders such as employees and the community over time and in the way that they want.
DAVID: Yeah, I love that, and I think that's a great way to look at it, in the heart. I talk to clients about principles and practices. There you have certain principles that you're going to guide, whether it's your wealth or your business, but those are probably not going to change, but the practices might, and so we need to be adaptive to that. But if you have that North Star, it actually really helps you. And then on business strategy, I was working with a client once on a purpose trust, I think we talked about this, but one of the questions, he was so well known as the founder, he didn't have children in the business, was starting to come up, “What is your succession plan?” And for him, the purpose trust helped answer that question, that our mission, our direction, aren't going to change. I've run this company with purpose, and now I have a trust that's going to do the same thing. So for him, not only was it, was it a fulfillment of his goal, which was to continue to have an impactful company, but it helped to actually answer that long term question in a service business, which is, “What if something happens to you?” So I thought that was great. Okay, so obviously, this tool has been around for a little while. It's certainly a new tool, but I think it got a lot of notoriety with Patagonia, when Patagonia announced, I think, very publicly and intentionally, to try to bring awareness to purpose trust. But maybe, could you just take a little bit and just briefly describe maybe the Patagonia structure, and then maybe an example, or another client example of a purpose trust. So I think people can really wrap their head around and again, maybe Patagonia is the best one to look at, because it's potentially the most well known.
NATALIE: Sure. So I can say I've been working with businesses on a variety of industries and sizes on these trusts. So I've worked with companies as small as 5 million in revenue to 800 million in revenue, with 20 to thousands of employees. So this solution can be applicable across a variety of industries and companies.
DAVID: That's a great point, because sometimes people think, “Oh, well, that's Patagonia, but that doesn't apply to me.”
NATALIE: Yeah, it's actually one of the things I like about it. For example, some folks look at, “Okay, maybe I'll go the employee ownership route, like an employee stock ownership plan.” Well, there's really kind of a minimum viable size for that kind of a plan, because there's a lot of administration associated with the plan and expense, and so you have to have a company of a certain size to do that. But like with the purpose trust, I'll give an example. I worked with a company called natural investments, which is an investment advisory firm. They have about 25 Wealth Management advisors, and we did a purpose trust for them, because they were challenged with the kind of they were bringing on new younger advisors. They were thinking that those advisors would buy out the existing partners. But as they had grown so much, the value of the firm was more and more, and it was too much for the new, younger advisors to kind of buy into the partnership and really buy out the founders. So we transitioned to a purpose trust that kind of ends that ownership treadmill of finding the next buyers and the next buyers, and the firm is now just permanently owned by its purpose. And we took on a loan to create some financing for the existing managing partners to be bought out, and that's being paid down over time. So kind of a simple solution for a smaller company. But let's get into Patagonia. So Patagonia had been looking for an ownership transition solution. They obviously have family members working in the business, but the Chouinards were very clear that they didn't believe in that huge intergenerational wealth transfer of making their kids billionaires. They started the company, they believe that their kids, if they want to work in the business and run the business, and that they can earn income from doing that, and it's kind of merit based. So they didn't want to go the family ownership route. Over the years, they had looked at things like employee ownership and felt like that might take the company off the mission, which in their case, was really being a model responsible business, and putting a lot of their money back towards research and innovation to being a leader in outdoor apparel and environmental sustainability. So they plow a lot of their profits back into their products, their supply chain, research and innovation, and then also donations towards causes they care about. They looked at, “Well, maybe we could do this external sale and get a lot of money for the company, and we could use that money for donating to causes that we care about.” They said, “Well, why would we want to cash in one point in time and take that money and use it for philanthropy, where the business might not continue to what it's been doing to be a leader in sustainable business. How do we sustain the business, continuing to be a leader in sustainable business, and actually use the income over time towards those causes we care about?” So the company makes hundreds of millions of profit a year, so why cash in for a billion dollars at one point in time and donate the money and the business might not survive the way continue to operate the way it has. What if we put in a purpose trust that will allow the business to continue on lock in that it'll in the trust agreement that the Board of Directors needs to continue to deliver results, to keep the company competitive, being a leader in sustainable business practices with its products and services. But then, alongside the purpose trust set up a 501(c)(4) which is a type of charity that has dividend rights. So that the company, as it generates money, it reinvests in itself, stays healthy, and then excess profits flow up to a nonprofit that then distributes those profits out to save the planet, is what they have defined. And so in this way it becomes a self-sustaining engine for giving that it will be giving for decades into the future. So what could have been that, one time cash in, becomes this ongoing flow of donations to causes that Patagonia cares about. So as the company grows and as it is successful, more and more goes to this organization they set up called the holdfast collective that can take it and give that money to kind of environmental causes. And the purpose trust ensures that the business continues to be run well. At one point, they had looked at kind of direct foundation ownership of the business, and one of the problems that they felt about that was that, folks with the nonprofit skill set and the philanthropic giving skill set don't necessarily have the same skill set of how to run a good business. So they really wanted to ensure that people with good business acumen continue to be on the board of directors, managing the company and at the trust level, would appoint good business stewards, and then they could have great people working with them on the nonprofit side of the whole fast collective, deciding how to give that money away to activist causes that are not necessarily business people, thinkers. They're more charitable thinkers.
DAVID: Yeah. I always love both and solutions to either or problems. So often people feel like they have these two opposing objectives, and yet they were able to accomplish both of those. So, yeah, I thought it was a very elegant solution for them. So you and I could talk all day about purpose trust, but they've limited us to 30 minutes, so I want to be respectful of that. Maybe just end by, if you would just share a little bit about purpose owned and if there are advisors or planners or consultants or even business owners who are thinking about going down this route, how might you help? Or what should they think about or consider as they look at alternatives for their businesses or the companies they assist.
NATALIE: Yeah. So what my firm does is we are business ownership transition advisors. So oftentimes, business owners are starting to think about succession. They're starting to think about their plans. Maybe they've tried the traditional routes. So they've first thought about family ownership and passing the business onto their kids. But over time, their kids have got other interests. They're out there doing other things, and they've decided that's not the right route to go. Maybe they've already explored some kind of an internal sale, like I described, a management buyout or an employee stock ownership plan, and decided for whatever reason, it wasn't feasible. It was too expensive, it was too complicated. Maybe they even explored some kind of an external sale, got some valuations, got some offers from private equity, and they decided, “You know, I don't, I don't. I'm concerned that this won't really keep my legacy going.” So oftentimes people have kind of looked at these other options, and they're saying, “You know what, I'd like to explore a purpose trust option. So they're not ready to dive in yet, but they want to get educated about it and explore what it might look like. So my firm does kind of discovery and education for board members, for business owners, on what these ownership models can look like, the different ways that can be structured. How they compare partial purpose trust ownership, full purpose trust ownership. So we'll help them with that discovery. They continue to be interested. We will work with them when we call visioning and viability. So actually putting together that financial model on, “Okay, we're going to do this ownership transition. How much do you need out of the business for your liquidity? Do you need that upfront? Do you need that over time? How does that look? Do you want to keep some investment in the business over time? What does the business need for its strategy and operation?” So really doing kind of the financial modeling of the ownership transaction, and then also helping them decide on the visioning side: what is that purpose? Who is that leadership team? Have you built this into your culture? So really fleshing out kind of how the transition would align with that heart side. So we help them map these things out, and then we come up with the plan. And they say, “Yes, we want to execute the plan.” And that's when we actually get into the drafting of the legal documents, the transition, putting together the finance to make the plan happen. And we work with advisors along the way. So we'll get their CPAs and their corporate lawyers and their estate planners involved in some of these conversations throughout the process. Maybe they're in those kinds of discovery section sessions, comparing and contrasting models. Maybe they're helping build out some of the tax implications of that financial model. So we work with them throughout and obviously we have strong partnerships with legal advisors on actually implementing the structures. We're not attorneys. We don't do that. So we're really just helping the business owners think through and flesh out the design of the plan, which are often just conversations. You need to have a series of conversations with business owners and sometimes facilitating their conversations with the leaders of the business too, around kind of their joint plan with the people who will carry it forward.
DAVID: Awesome. Well, I thank you so much for your time, Natalie. And if people want to connect with you, purposeowned.com is a probably a great place to go to get some more resources and contact info.
NATALIE: And we've also recently launched a nonprofit called the purpose trust ownership network. It's called trustownership.org and our goal with that nonprofit is to spread public education around purpose trusts as a new and emerging ownership solution, case studies about the different ways companies can set these up. So you can look up the Patagonia example, or you can look up an example of a smaller, more employee focused company. There's really a variety. So really through that network, sharing, research, education, case studies, best practices and a place for practitioners. So CPAs lawyers and others working on these transactions to share best practices and build this field together.
DAVID: All right. Well, awesome. Thank you so much, and thanks for those who've listened. I hope you are encouraged and intrigued about this new tool that I think has so many applications and potential uses. So again, thanks for your time, Natalie.
NATALIE: Thank you so much. Thanks for having me, bye.
