Bicycle For The EO Mind

Meet Michael Kramer from Natural Investments, a financial advisory firm specializing in socially responsible investing that transitioned to a Perpetual Purpose Trust (PPT) in 2023. After joining as the firm's third financial advisor in 2000, Michael served as managing partner from 2007 to 2023 before becoming a trust steward and manager during their innovative ownership transition.

Some takeaways:
  • How the growing valuation of their successful firm made traditional succession planning impossible, as younger advisors couldn't afford to buy in
  • Why they rejected lucrative acquisition offers from larger firms to preserve their mission of "using money as a tool for social change"
  • Their creative financing approach: borrowing from RSF Social Finance for the down payment, with customized promissory notes for each exiting partner
  • How they decoupled governance from ownership by creating a Trust Stewardship Committee with 3-year rotating terms to increase diversity in leadership
  • The importance of early stakeholder engagement in the transition process to gain buy-in and incorporate diverse perspectives
Click here to watch this episode on the Zolidar YouTube Channel.

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CHAPTERS 
  • (00:00) - Introduction to Natural Investments and Transition Planning
  • (02:53) - Challenges in Business Ownership and Succession
  • (05:27) - Exploring Alternative Ownership Structures
  • (08:09) - Values Alignment in Consulting and Decision Making
  • (11:05) - Maintaining Culture and Legacy During Transition
  • (13:33) - Financial Considerations and Valuation Process
  • (16:34) - Financing the Transition and Community Impact
  • (18:59) - Normalizing Financials and Predicting Growth
  • (21:54) - Aha Moments in Trust Stewardship and Governance
  • (31:15) - Leadership Development and Trust Stewardship
  • (32:30) - Defining Purpose and Objectives
  • (34:15) - Governance Structures and Legal Frameworks
  • (37:02) - Navigating Legal Documentation
  • (38:36) - Financial Planning and Scenario Modeling
  • (39:07) - Preparing for Worst-Case Scenarios
  • (41:45) - Engaging Stakeholders in the Transition
  • (43:47) - Reflections on the Transition Process
  • (46:09) - Future Goals and Technology's Role
  • (48:38) - Advice for Business Owners on Exiting
  • (54:48) - Podcast Outro

CONNECT WITH NATURAL INVESTMENTS
REFERENCED IN THIS EPISODE:
MICHAEL'S FAVORITE QUOTE 
"It's not what you look at that matters, it's what you see." - Henry David Thoreau


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Note: This podcast is not investment advice and is intended for informational and entertainment purposes only. The views expressed in this episode are solely those of the guest(s) and do not necessarily reflect the opinions of the host or Zolidar.

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Creators and Guests

Host
Matthew Epperson
Bicycle for the EO Mind Host, Employee Ownership Domain Expert at Zolidar
Guest
Micheal Kramer
Founder| Natural Investments
Producer
Sana Saeed
Bicycle for the EO Mind Producer

What is Bicycle For The EO Mind?

Most small and medium businesses (SMB) struggle to sell — employee ownership is a proven exit path. Hear real stories from business owners who transitioned through employee ownership. Whether you're an owner, advisor, or investor, we dive into expert insights, practical strategies, and how technology is reshaping exit planning.

Matthew (00:05)
Welcome back everyone to the Bicycle for the EO Mind podcast. Today I have with me Michael Kramer from Natural Investments. After 10 years as a client, Michael joined Natural Investments as its third financial advisor back in 2000. He was a managing partner of the firm from 2007 to 2023, at which time he became a trust steward and manager. How are you doing today, Michael?

Michael Kramer (00:25)
I'm doing well. Thanks for having me. Awesome.

Matthew (00:26)
So just to start us off today, I'd like to ask, what's a favorite quote of yours and why?

Michael Kramer (00:30)
Well, what came up for me today was Henry David Thoreau, and he said something that I think is fairly meaningful for today, which is, it's not what you look at that matters, it's what you see. I've always liked that perspective is everything, perception is everything, and in this world of alternative facts and misinformation, it seems like he was very prescient for his era.

Matthew (00:55)
Certainly, we need that wisdom today, absolutely. So let's move to the earliest stages of the process. Before you even knew about perpetual purpose trust or had decided to become one at National Investments back on your day zero, so what prompted you to consider selling the business?

Michael Kramer (01:10)
Our plan had always been to continue in the mold that we had been, which was having our advisors be owners. I became one of the three owners 17 years ago, and our plan was to always bring on more advisors, sell our shares to new advisors. And we had this fantasy that we could have 20 advisors owning 5 % each, for example.

And the challenge that we faced, so we started down that path in 2017, one of the three owners sold a portion of his third to three other people. So we were starting to make progress. So up until last year, there were six of us who were owners. However, our success as a firm, changed the valuation of the company and made it so prohibitively expensive to own that advisors were turning us down. They were you know younger people with other obligations saying, I can't afford to do this. Or I could only do it in a very slow way, in a very small way. And based on that reality, we were never going to be able to accomplish our goal of selling the entire firm in a timely manner to other internal advisors. And I think this is a problem a lot of businesses come up against, which is why they end up having to sell to a bigger company that has resources. So we didn't want to do that, so we just started looking around at what are the other ways that we could do this without having to sell to another firm.

Matthew (02:53)
And I believe also, so you're all correct me if I'm wrong, but it was also part of like a retirement strategy as well, is that right?

Michael Kramer (02:59)
Well, eventually, yeah, the three owners were all over 55 and we're thinking, well, how do we get out at some point? None of us are leaving anytime soon, but it's going to happen. And so you certainly want to have a succession plan in place, even if it takes 10, 15, 20 years to achieve. And so we definitely wanted to figure that out and we knew we had to start now because if it is going to be something that takes years to accomplish, we need to make sure that we get the ball rolling. So we were feeling a little bit of pressure to get the process started.

Matthew (03:35)
Yeah, so sounds like the timing of the transition, how that transaction would take, you know, not spending decades to potentially to transition out the shares that you held in the company was an important factor. Also age slash retirement considerations. Were there other factors that were kind of top of mind when you're starting to think about your options?

Michael Kramer (03:55)
Yeah, I mean we had always been 100 % owned by white men and then up until about 2017 when it became only 80 % owned by white men and that didn't match who we wanted to be in our at our making ownership level decisions. So we were highly motivated to try to change those demographic dynamics. We wanted to find a way to make it more diverse because we know that that's better for business and more reflective of our values. So we were highly motivated to change that and figure out a way where we could have more women or non-binary leaders, people of color. So that was a massive priority for us, maybe starting five or six years ago. Well, I think it had always been a desire, but we didn't have very many people of color to even choose from. So we had to start changing our advisor composition too and we're now at about 30 % people of color and we're over half women. So we have definitely been making a ton of progress there. So the pool of potential trust stewards also improved as we changed the nature of our firm.

Matthew (05:11)
Yeah, so I'm kind of hearing you guys are adding in also the values, one of which was close was increasing diversity. I'm curious, can you walk us through like what was your kind of next action when you thought about planning the exit? How did you kind of go about thinking about the options that might be available to meet those criteria you were thinking about?

Michael Kramer (05:27)
There was a company that we invested in called Organically Grown Company, a natural foods distributor in Oregon back in 2018. And they had come to us seeking capital so that they could make this transition in their ownership. Very similar kind of dynamics. The owners wanted a succession plan. They wanted to figure out how to get all their stakeholders involved. And they needed some outside capital to help make it happen.

And so we had some clients get involved in that and help invest in that to make the transition. And they were one of the earliest perpetual purpose trust conversions that we had seen. And so we remembered that when it came to us looking at ourselves, we were like, you know, what about that thing organically grown did? That seemed like it really worked. And maybe we should look at that. And so.

The wonderful thing is that Organically Grown spun off a consulting arm because they were getting a ton of inquiries. and so they had a group of people who had been through the process who were now available for hire, essentially, to help other companies who wanted to look at various alternative ownership structures. So we hired them for a full year to lead us through the gamut of all the different types of alternative ownership structures that are out there, and there are many. And so it wasn't just that we thought, we have to be a trust. We thought, well, let's take a look at everything and see what makes the most sense for our business model. So we spent a full year with them analyzing and looking at case studies to figure out what would be the best fit for us, and it ended up being the perpetual purpose trust. I think primarily because we're all independent contractors who own our own businesses to a larger LLC. It's very different than an employee. We don't have any employees. So there are certain types of structures that just won't work for a firm like ours. But obviously we had studied co-ops and we had studied various ESOP models to look at how do they do it. And the trust just seemed to be the best fit for us. So was very exciting, but we really were taking our time. We did not want to make any rash decisions, so that's why we spent a full year analyzing options.

Matthew (07:44)
And so thank you for walking me through how, you know, alternative ownership advisors were so crucial and kind of giving you case studies and thinking about those different options that would kind of meet those criteria we were talking about before. Can you take me a step back there to like when you were thinking about your options? So you became aware of Organically Grown Company and you knew that the folks who are involved with Organically Grown had spun off AOA. Was there kind of other like due diligence you'd gone through and you're thinking about like who is going to help you in this process?

Michael Kramer (08:09)
Well, there were only at the time, you know, maybe a couple of firms who you could turn to. And we did interview a couple to just see, you know, there's not a lot of, there wasn't a lot of experience at the time. And we just decided to go with these folks. So even though we like everybody who's committed to this work, we just decided to go with these folks and we developed a trust in them as they led us through that process for a year so that when it came to the implementation phase we decided to hire them again to actually help us with the implementation phase rather than switch to another firm that didn't know us as well. So I think part of the key to this is you know making sure there is values alignment not just with the people within your business but also with the people you're working with because they can get much better advice if they are aligned and really know where you're coming from.

Matthew (09:07)
And I can imagine that was quite intuitive for you all. mean, being in the financial advising industry, you've also figured out like, how do I also identify with the values of your clients? So you kind of took the same approach with your company.

Michael Kramer (09:16)
Yeah.

Yeah, was a nice reversal of roles too for us to be the client for a change and to have consultants asking us, okay, well, what do you care about? What are the most important values that you all have that you want to be reflected? And we had to to had realize that this had always just been living in our heads. Like we had never really codified it. And so we were being asked to clarify and to prioritize all the values of the firm. So it was a fabulous exercise to do because it really concretized exactly what we stand for and why and how important it is for us to have independence and autonomy and all the more reason why any kind of succession plan couldn't really involve outsiders. We wanted to maintain our culture because it's unique and people like it and people do feel like their voice matters.

And we do make a lot of decisions in a non-hierarchical consensus-oriented way, despite whatever power structure may exist. It's incredibly inclusive. That's not going to fit with all other firms, and we just really knew that we needed to protect that, because people really know how much they matter. There's not a lot of us and them in a non-hierarchical structure. It's not like there's management or ownership and labor.

It's much more like a collective. And so these were really critical pieces that we wanted to make sure that we honored as part of the legacy that we wanted to leave behind for those of us who were going to step off at some point. You know, we wanted to make sure that we protected that because we've never had people leave the firm after they've joined. They like it. The only people who have left have retired from the business but we've never had anybody quit. So I think part of that is because of how we are organized and also how we include people in decision making and the way we share power. So we wanted to find a structure that made sure that we did share power. And also we wanted to decouple decision making and power from ownership stake because it just seemed unfair in a way and kind of a disincentive.

If the power is tied to ownership stake, then you're always going to have that inequality. You're going to have owners. Right, you have all the benefits and you have all the power by being an owner. The other issue that was concerning to us is debt. We didn't want people to have to go into extensive debt and bury themselves in it in order to have that power. That didn't really seem right.

Matthew (11:38)
as well as financial upside, yeah.

Michael Kramer (11:55)
It was okay for me to do when I bought in in 2007. It wasn't very expensive. And even though it took five years to pay off my shares, it's a fraction of what it would be today. so strange problem to have success.

Matthew (12:09)
Right, and I was gonna say with 0 % turnover, that's an enviable position for many companies as well. And I'm also hearing so much about like culture and legacy being tied up with non-hierarchical culture that you had developed at Natural Investments. I know you had mentioned previously like you were getting third party offers and I'm just curious, were there ever maybe was there ever a moment where you're like, well, maybe a third party offer could preserve what we built or was that not even? You know, from...

Michael Kramer (12:36)
There are, we've seen some of our peers do sort of a hybrid approach where they'll take equity, an outside equity firm will come in and take a 40 % stake in your company to help with the transition. But then they're siphoning off capital so that they can get paid back at their internal rate of return requirements and it just seemed like that was the only other thing that we actually considered because we had seen some other socially responsible investment advisors do that and so I was being introduced to those types of folks and it seemed fine for what it is, it just wasn't exactly the right fit. So we never really seriously considered selling the company outright to anybody and we do get offers all the time. But they're usually not from socially responsible firms. They're usually from larger firms that would love to have a socially responsible department. And they would want us to be that department. And we've seen that before too. We saw Goldman Sachs do that with one of our colleagues. We've seen other big firms scoop up smaller shops to become their responsible division. There's just no way that would have ever worked for any of us. To have that type of company that isn't aligned with us would never have worked.

Matthew (13:55)
Right, you can bolt on certain things, but we try to like bolt on values. Doesn't always quite work like that, yeah.

Michael Kramer (14:02)
And in finance there's so many people that are just motivated to earn as much money as possible and that's just not who we are. We're here to use money as a tool for social change. And yes, we want to be paid in the meantime and, but making money is not our sole goal here. We're trying to evolve a system and transform capitalism is really the mission. So that doesn't mean maximizing profits. So in actuality, the three, the owners, the previous partners, we left a lot of money on the table as the saying goes by doing this. Because we had offers with multiples that were off the charts, premiums they call them, because of our special knowledge and our special role as leaders in our space, we were going to be, we could have gotten much richer by selling than doing this. So that's reflective of who we are. That wasn't the point.

Matthew (14:55)
Yeah, and you'd also kind of hinted at this and I want to get more into it, certainly with being a perpetual purpose trust, the things that were in your head and then you kind of had to codify into that, what is that exactly, that purpose. I do want to get into that, but I also wanted to ask you, when you think about like tools and methods that helped you maybe plan out transition and specifically like the people involved in the processes of the business, did you have tools to help you with like transitioning that aspect?

Michael Kramer (15:20)
Well, the consultants asked us, I mean they were the ones with the tools, that's why we hired them, we didn't have them. But one of things that became of paramount importance is the timeline. We needed to, in essence, backwards plan from the endpoint of when this type of transaction needed to be complete in order to figure out, well, what's a reasonable timeline for doing this? Because

The company didn't have the cash reserves to just buy us all out in one transaction. That was impossible. And part of the reason for that is, yeah, we just didn't have a lot. We just have never had a lot of cash lying around. We were always reinvesting it in the company.

The timeline ended up being the most important thing. And one of our partners is nearly 70 years old. So it really accelerated the need for us to really think about how are we going to take care of that person in particular whose timeline is way shorter than others. So that became, so that sort of time management, I wouldn't call it a tool, but we really had to think about that. And we ended up coming up with a plan that was different for the senior partner, an accelerated payout. And actually for myself, I deferred for five years my promissory note. So my promissory note doesn't even kick in for another four years so that we could exit this elder in the firm who's one of the founders of it.

So that type of thinking, I think people, maybe that's unusual, I don't know, but that's what we had to do. We had to spend a lot of time doing modeling, just using spreadsheets of trying to model out five years, 10 years, 15 years, how could we model out our cash flow and our debt financing in order to make it work for every individual person. So that was the thing that we really wanted to do is not just have a cookie cutter for everybody. We were really trying to take care of people and to treat them based on what they could do, what they wanted to do, what made the most sense for them and not just what makes sense for the firm at the same time, the firm can only do so much. There's only so much cash it can make available unless it grows for promissory note payments. Earnout is another category of how the previous partners are being paid.

That was the hardest thing that we had to go through, is that type of modeling. We made so many revisions to those projections. Because the other thing you have to do is you have to anticipate growth and then you have to figure out, what's a reasonable conservative rate of growth that you're put in your models in order to even do these calculations? So that was the hardest thing. luckily, the consultants that we had had these fancy spreadsheets and processes and the tools that they had were incredibly valuable. So I don't think we could have done this without them.

Matthew (18:36)
Yeah, that-right. and yeah, I was going to say that, so sounds like you all, and it makes sense that you all would have a lot of sort of spreadsheet acumen anyway. You were able to do a lot of your own projections, it sounds like. But I was curious specifically about valuation in that piece. So did you kind of have an informal valuation before the formal valuation? Was that like part of the regular practices of natural investments to do that?

Michael Kramer (18:51)
Mm-hmm.

Yeah, when Christopher Peck and I bought in in 2007, we hired a valuation firm that's specifically for the financial advisor world. And we decided to use them again 16 years later. It's the same firm. And this is their specialty. And they have different methods, but we felt like we needed an objective, professional, independent valuation, and, part of that is just that objectivity and it just gives the impression, and it's true, that you're not trying to play games with the valuation, you're not over-inflating, it's just primarily quantitative and you look at discounted cash flow models into the next 10 years.

Now in many professions, valuation is also just a multiple of gross, annual gross income. So there's different methods and so we went through that process with them. It took about three months. And we decided after it came back, it was very consistent with what we expected, what a typical multiple is, even though there is a wide range these days there is an average. It ended up being about the same as what we had done 16 years ago and we just accepted it and all the partners just said, okay, let's just go with this. We don't need to mess with it. So that part was not that difficult and it was critical. We had to do that anyway even to get to borrow money which we did for the down payment.

Matthew (20:25)
And it worked. Yeah.

Michael Kramer (20:34)
they insisted that we have an independent valuation as well. think if you're self-financing it completely, you might not have to do that, but they were requiring that as well.

Matthew (20:44)
Yeah. Yeah. And I definitely want to get into the financing aspects. You were kind of hinting at this too, Michael, about the sort of the normalizing of your, ⁓ of your financials. And I had, you know, seen elsewhere that you had mentioned that like you all did pretty well during the pandemic. That's something we thought about a lot at Zolidar actually is like how to sort of, ⁓ take account of something like maybe there's spikes related to an event like the pandemic. Could you talk about like the normalizing of your financials?

Michael Kramer (20:49)
Yeah.

Well, it's been hard to predict because you never know when investors are going to show up at your doorstep. The pandemic was unusual. And so we grew at a much faster rate during the pandemic. People had a lot of time on their hands at home, reflecting on the purpose of their life, looking at their finances. Life sort of came to a halt for many people.

And smart people use that time to really look at themselves and look at their lives and make plans and so we got a ton of new clients. We typically would get about 100 new clients a year. we had a little more during that period. But the other thing that you can't predict on is, you get X number of clients per year. You don't know how many assets they have.

So you could get a lot of small clients, you could get one enormous client. So that's where it becomes really difficult to predict. And that's why we just have to, anytime we're doing budget projections, we never actually project growth in next year's budget. We keep it flat from the current year because the other thing that could happen is the market could have a massive downturn. Our entire revenue stream is based on the value of the investments. So when they go up and down, our income goes up and down. It's not like we're charging a flat fee that you can rely on. So it's a very organic, very flexible situation, financial situation that we have to manage all the time and we have been fortunate and I think that new new client assets can counter any downturn in the market and there was the pandemic had a massive downturn for everybody in the value and so yeah you know you're always having to like do these scenario plans of all right what if what if we lose 20 percent of our revenue then what how do we

How do we adapt?

Matthew (23:12)
Yeah, and also I wanted to come back there to sort of the financing structure that you ultimately landed upon. and you mentioned, so this particular financier was looking for that independent valuation. Is there anything else about the process of like sort of bringing in the right partner to help with the financing?

Michael Kramer (23:30)
Yeah, we do a lot of investing in community development, financial institutions. It's a big part of our portfolio. It always has been. It's the non-Wall Street investments part of it anyway.

And most of these CDFIs, as they are referred to, have a mission and typically a social purpose. Sometimes an environmental purpose, it depends on what it is. But these are loan funds, primarily. There can be also credit unions and banks, but they are non corporate and they are really trying to provide capital to marginalized populations and often low income people in communities, often people in communities of color. And so we wanted to go with one of those that was committed to that space. It seemed like it would be walking our talk. And we needed to borrow a million dollars so it wasn't like we could just go to anybody. But we felt like we wanted to have a down payment so that the sale of the firm, at least to the previous partners, would feel like a transaction. Okay, something happened here, there's some down payment. And it would at least feel pretty good to the outgoing owners. So we just borrowed 25 % and or somewhere in that neighborhood as a down payment. We went with RSF Social Finance. They've been around for 40 plus years and they've had a social investment loan fund during that period and they were the folks that we borrowed from. We did an extensive search and ultimately picked them. Part of it was that we actually had some limitations on who would loan us money. In part because we were 80 % white male owned. That didn't fit every lender. Totally understand that. And also the size of the loan was large. So there's not that many that would handle that. And the terms also. So there's a lot to look at when you do that. that was one of the pots of money was the down payment and then the other two parts, promissory notes and you know, over a period of years. And again, they're slightly different for each outgoing partner, and as I said, a couple of us, our notes don't even start for another few years. And then there's earnout which is an annual calculation based on profitability. And we have a formula there based on the amount of revenue that's available, because the formula is that some of it will go to the purchase price towards the purchase price and some of it will go to profit sharing because that was one of the things that we wanted to codify as a benefit instantly through this conversion which is that we would always have equal profit sharing amongst all advisors at whatever level the company could afford. So there's a baseline minimum and then based on revenue we can increase that depending on how much is available. So there's a ratio of of earn out to previous partners and profit sharing. That was really really important to us. So that at least symbolically it's not a lot of money at the at the outset because of all the debt financing that is going on but symbolically it really matters because we wanted people to know that yeah this is this is part of the value of changing is that everybody benefits equally.

The benefits are no longer tied to how much you own because nobody owns anything anymore. So now it's equal and it has nothing to do with how much money you generate for the firm. We have people just starting their practice who have very small books and we have veteran folks with over 30 years of experience with very large practices but we really equality is a big value of ours so we really wanted to treat everybody equal because it isn't how much money you make, you know we're just all about, we're in this for a cause, we're all paddling the canoe in the same direction as we say out here in Hawai'i, and we wanted to treat everybody equally in that respect.

Matthew (27:47)
Yeah, and this has just now become such a recurring theme now that you all have taken your values and just applied it across more or less everything that you've done in terms of your succession, who you picked to work with, how you've created your financial structure for the transaction itself, how you've approached the succession planning that you've done. I'm curious, did you have any like, particular aha moments during your exploration, anything that stood out or surprised you in this process?

Michael Kramer (28:12)
I would say that. the notion of how do the trust stewards become trust stewards. that was an interesting exploration of like, who should be in charge? And how do you figure that out? So I wouldn't, I would say that was, I won't call it a surprise, but it was, we were trying to figure out, who should qualify and what should it take to qualify to be one of those people? And we ended up,

I think somewhat surprisingly, really reducing the barriers there. For one thing, not only can advisors become trust stewards, but any of their employees that they hire to help with their individual practice, they could become eligible too. So we could even have non-advisors in these stewardship roles. So I think that was a bit of an unexpected decision that we make. because ultimately, you know, they work for an advisor, but they aren't an advisor. So that was interesting that we decided to essentially make them eligible because, you know, they're often just as invested in the success of the operation as anybody else. So we didn't want to create hierarchy and say, well, you know, only advisors could really make the right types of decisions. Like, no. Actually, no. That's actually not true. And then we wanted to have terms. And I don't think we really had thought about that previously. And so, because what we want to do is rotate. And that became an interesting thing. Well, how do we rotate people in and out? We want everybody to take a turn if they want to. So it's actually an election process and people have terms and the terms are three-year terms and then people can run again but and we have the term staggered so that not everybody's leaving at once but that was kind of an unexpected sort of structure like how do you how do you do that so in any given year a couple of of people will step off. So you'll have a core group of seasoned, experienced people and you'll always have a couple of new people that you're mentoring. And hopefully we just keep that going and everybody will get a chance to participate and learn and it's so important that people learn the inner workings of how strategic and financial decisions are made for the whole. So I think ultimately that was one of our greatest obstacles that we solved. It's figuring out how to do that, how to structure that, and how to both provide continuity through this transition into a new structure so some of us stayed on.

Some of the former partners became trust stewards to assure continuity because someone has to mentor the new people how to do it, but we definitely look forward, I definitely look forward to stepping off. If we train enough people, then I can just go back to being a financial advisor and other people can be in those roles. I was never interested in power for its own sake, it's just a role that I was playing and I'm happy to have other people step into it. I really like what we've created here and it takes years to mentor someone how to take over a business in my opinion. So I think we're doing it very slowly in this way and really helping people develop knowledge.

Matthew (31:32)
Yeah, so sounds like leadership development is a huge piece of what you're describing, Michael. So it's, you know, inviting them into this role that didn't previously exist, the trust stewardship, and it's a committee. Is that right?

Michael Kramer (31:37)
Yeah.

Yes, yes. There's seven of us. So it's about a third of the advisors. And yeah, so as I was saying earlier, because of our racial and gender equity desires, we've instantly changed the whole group. It's, you know, three out of the seven are women, two out of the seven are people of color. So we've already instantly changed that and that will improve over time too as some of us white male partners step off.

Matthew (32:11)
Absolutely, and that'll really deliver on that mission there as well. Can you talk to, I mean, we were hinting at this previously, but when we talk about the trust stewardship, then we're talking about, well, what are we stewarding? And we've talked a lot about your values, but how did that work when it came out of your head and now it's become articulated as values we will now steward, that purpose that you defined?

Michael Kramer (32:31)
Yeah, essentially the company is owned by a purpose, and so you have to define, well, what are the objectives to advance the purpose of the trust. So we had to actually figure out what are those things. And so obviously we need to make sure, because the trust now is the single owner of the LLC instead of six individuals. the purpose owns the company. So we wanted to make sure that we could share all the economic rewards equitably amongst all the advisors, as I mentioned earlier. We wanted to make sure that we could sustain all of our fiduciary duty to our clients and make sure that advisors have their autonomy to operate their practices in the way that they want but also have a collaborative dynamic. And then we wanted to make sure that we could bring value to an infrastructure and to support all of our advisors in running their businesses. We wanted to promote shared power in company oriented decision making and obviously continue to commit to our environmental, social, and governance practices and policies to benefit all of our stakeholders. know, we're a B Corp and we're a public benefit LLC with requirements and certifications there. So there are certain principles and ways of operating that we do to maintain that status.

Those are essentially the purposes that the trust was created to assure. So they're big picture purposes and you know, they don't, the trust doesn't get into the weeds of that. That becomes, you know, the trust stewards hire managers. Like I've been hired as a manager to oversee the day to day and essentially make sure that those seven purposes are fulfilled through how we operate on the day-to-day level. so Christopher Peck and I are the two managers, so we're no longer managing partners.

And we too are going to turn them off at some point in the next few years as this new structure takes hold and other people can take our place as managers as well. So lots of different types of succession going on here, not just at the ownership level, but also at some point management as well.

Matthew (34:48)
And I've heard some other perpetual purpose trusts we've talked to have also mentioned, you know, that they'll have a couple other structures within their governance. So maybe was there a directed trustee in your case?

Michael Kramer (34:58)
It's not called a directed trustee. We have what's called a trust enforcer. And the trust enforcer is somebody to hold the trustees accountable for fulfilling the purpose. So it does have a legal standing. And we decided to pick a retired investor and investment advisor from our firm and have that be the best type of person, somebody who's steeped in the organization but is no longer active, but knows enough about it, but to monitor the activities of the trust stewardship committee and has the ability to take legal action if there's a violation of the purpose, if suddenly the trust stewards become self-interested or try to do something that is perceived as a violation.

There's a bit of a protection of of the purpose by this enforcer. So we've been talking with other purpose trusts, folk owned companies to see how their enforcers are doing that. Some are way more active and involved than others, but it's a good monitoring function that I think is important, kind of a check and balance, if you will. A company like ours, where it's all about ethics and values, you know.

It's really unlikely that the enforcer will ever be doing much, but it's still an important piece of it. And it is, yeah, I think it is something we wanted to commit to. We also have an administrative trustee, which is a trust company in Delaware that is our, you know, the legal, you know that basically registers the trust in Delaware and makes sure that we're solvent essentially. They don't have a lot of power in terms of our day-to-day, but they kind of hold the trust, if you will, as our agent in Delaware.

Matthew (36:42)
Yeah, and this is, you know, it gets to be such an interesting interlocking machine of checks and balances and governance oversight. I'm curious, and of course that has so many legal implications to it. Can you talk more about the sort of the legal document development? Like, for example, how did you find out what documents would be necessary in this transition?

Michael Kramer (37:02)
So one of the great things about working with consultants is they knew that we needed an attorney and they knew that we needed one who's experienced in these types of things. so they recommended several attorneys and we ultimately picked one who knows. There were probably 25 different documents that were needed. I don't think there's any way we would have known anything about any of this. But they all helped us draft the the language and the clauses for the trust agreement itself. So you know, trusts have been around a long time, so it's not that there is some boilerplate language that's available, but having attorneys to help you figure out, you know, exactly what the roles are for each of these parties that we were just referring to and exactly what the composition and qualifications are of the trust stewards and how elections and terms happen. We spent about a year going through, all right, what if a trustee resigns or how does somebody get removed?

You know, there's all these typical things that you might find in an operating agreement for a company. You have to think through all of these things, even for the trust itself and how it operates, the covenants. Very time consuming. Thank goodness for attorneys who specialize in this. And the consultants are so wonderful. They're just so great.

Matthew (38:27)
Yeah, so you mentioned this maybe like 25 documents and you mentioned the trust agreement it sounds like was kind of where you spent a lot of your brain power, at least in terms of the legal documents, is that right?

Michael Kramer (38:33)
Yes.

Yeah, definitely. It's the one where you have to really come up with your own, have to draw your own conclusions about how you want things to be. You know, other transaction documents are kind of boilerplate because, you know, the existing LLC members have to sell their, they have to withdraw their membership in the LLC and it's all very boilerplate when it comes to, you know, selling a business. That's not all that unusual. So yeah, coming up with the trust itself, designing it essentially from scratch.

That is the time consuming part, for sure.

Matthew (39:07)
As you were going through that process of negotiating that trust agreement and you were considering different scenarios, was there maybe one that stands out to you as like, ooh, that would be a really worst case scenario in terms of how this trust thing might develop and what would we do about it that you might remember?

Michael Kramer (39:22)
Yeah, mean the worst case scenario is like, okay, well what happens if the company is failing? Then what? What powers do we give the trust stewards to decide what to do with the company?

We had this whole idea of perpetuity. That's the whole basis of it and we wanted to restrict the ability of the the trust stewards whoever they happen to be at the time of selling the company But what if the company needs needs to merge or needs help and it's struggling So you're trying to imagine okay under what conditions would we allow a merger or a dissolution? So you actually have to think through How would you do that?

How would you even go through the process of dissolution? And is that something that requires unanimity in the vote or just a majority? So we had to actually have to, we had to come up with rules for majority, super majority and unanimous votes. Which issues regarding the company require certain types of votes. And in some cases the trust enforcer needs to also be involved, and the administrative trustee. So that's part of that check and balance, that the trust stewards can't just go off and do something radical. So anyway, that's a lot of what's baked into the documents. That's all in writing. So regardless of who's involved, there are guardrails as far as what & how what the company can do and what the triggers are that would be required in order to make material changes to the mission of the company or to the purpose itself or to liquidate or dissolve or merge or acquire or anything like that. So, so much to think through.

Matthew (41:07)
Yeah, and know, anytime someone brings up the differences between, you know, majority, supermajority, consensus decision making, it makes me think of a decision matrix. I'm curious, was that something you developed?

Michael Kramer (41:18)
I don't know about a matrix, but we definitely had the categories and we were trying to figure out what should go in each category and there's probably six or seven things in each category of those three types of votes. And I think it covers everything, you know, there's about 20 different things divided up into those three categories. We hope it covers everything, you know. So I wouldn't call it a matrix, but there are some lists. I can give you some examples if you're really curious.

Matthew (41:45)
In terms of maybe we're thinking about also reflecting on the role of an advisor and how they can be helpful in these transitions, was there any maybe advice you remember that you received from your advisors, whether it was the folks at Alternative Ownership or Attorney or otherwise that maybe had the biggest impact on your approach to the transition?

Michael Kramer (42:04)
Well, one of the things that they, one of the pieces of advice that we accepted from them was we should really, at a very early stage, get buy-in from the whole team as to going through this process itself and not do it sort of in the back room as a bunch of partners making that decision in isolation. So when we came up with this idea at one of our annual retreats a few years ago, we presented it as a proposal to get feedback and to get input. And I'm really happy we did that. We thought we were going to have resistance maybe, or just not have people liking the idea. It could have happened, but we just generally had agreement. And it was really important because then everybody had this sense that we're all doing, we're making this together, we're doing this together. And I think people just like being asked what their opinion is too, about what should we do with this company? And that's part of the culture. And so then from that, we asked for people who wanted to participate out of the advisor, non-owner, non-partner group to be part of working with the consultants.

We set up a couple of committees, one on governance and one on financing, or the deal itself, to help us do all this research. And so we invited other folks to participate, and they did. And several of those people ended up becoming trust stewards because they got into the process early to analyze and help set up the trust. So I think that was really good advice that we got and I'm happy that we did that that way.

Matthew (43:47)
Great, so now we're moving to the sort of nearly the final phase. You've become a perpetual purpose trust. You're starting to reflect on the journey. How do you feel about the choice that you made to be a perpetual purpose trust?

Michael Kramer (43:57)
Well, I would say so far so good. It's been a couple years since we made the decision and it's been a year and a half since we really converted. And so far so good. I feel really good about it. Part of it is you know, the new people who have been elected are fantastic and so we're really thrilled because anytime you change the composition of that leadership group, you don't know how it's going to be. You don't know how the dynamic is going to be. There's an adjustment period. So that's been really seamless and so I feel really happy about that. In terms of structurally and financially, everything seems to be on target in terms of what we had projected and how we would handle it financially and based on revenue and debt financing and all this everything seems to be going the way we had hoped and so that feels really good but yeah I would say that pretty seamless for us and maybe because the structure isn't all that different from how we've typically operated but I really am seeing now the light at the end of the succession tunnel. I can really see, yeah, this is totally going to work. These people are going to be able to take over. And it does take a few years for people to really get it. We meet every month as a Trust Stewardship Committee, so there's a lot of learning and a lot of opportunity for people to see what's involved.

And at the same time, it's not overwhelming. That's what you don't want. Because we're all working full time. We're all financial advisors. This is extra. So it's really wonderful to see people care and to see them step up and take on leadership.

It's a wonderful thing. It was done to me, so I feel like I'm paying it forward. And it feels really good to be on that other side and watching people shine and take on these roles. And I don't know, it just feels really good. So far so good. have nothing, no regrets at all about this choice that we made. Definitely seems to fit who we are and our identity. And we're making the same, I think, good decisions that we always have.

So, happy about it.

Matthew (46:09)
Well, yeah, I think I might already know the answer. But were there maybe any goals that have remained unfulfilled that you all had?

Michael Kramer (46:15)
Well, I wouldn't say unfulfilled, but we obviously would like to maximize the profit sharing and it's going to just be minimal until our financial reality changes. So that is a goal to really make that significant and substantial. It just hasn't happened yet. We just started down this path and ideally it would be nice to do more of that. And then I would say - you know, we're going to have our next election in about six months from now for trust stewards and we want to increase the diversity more if we can. so that remains to be accomplished, I would say. But these are, we're moving in the right direction in both of these realms. It's just might take a little while.

Matthew (47:00)
Yeah, and with any of those, either yes, or could be more profit sharing, more diversity, or really anywhere in the journey. When you think about, you know, because we are a technology company, Zolidar, So are there any areas we think technology could have improved the journey to a perpetual purpose trust?

Michael Kramer (47:14)
Yeah, that's a great question because I'm not a tech-oriented person, it's hard to know what I don't know. Like it's sort of an odd catch-22. It's like I'm sure that templates and things for processes would have made our lives much easier and we had consultants to sort of give them to us and so in a way I could see how technology could substitute for that but you know we went with people who shared you know their spreadsheets and but I would say that tech probably can make this easier the other thing is that it could make it more cost-effective you know when you hire a bunch of consultants it's expensive and

I don't think there's a workaround, I don't know if there's a workaround for the attorney aspect of it. Maybe there is. But, you know, these are not inexpensive resources. So it's going to affect who can do what. So think a lot of small businesses that maybe are less resourced could benefit more from more affordable, tech-driven solutions. Would be my assumption.

I just really like having people I can ask questions to and I think that's a key piece is figuring out how to layer that into it so that people feel like when they get stuck or they just don't know where to go that they have support. That would be... It's the same thing, know, there's these robo-investment platforms in our industry where people can just do it themselves and they don't need to talk to anybody but inevitably they need to talk to somebody about something. Even if they need to get their money out for something.

Matthew (48:39)
Right. Right.

Yeah, and we're dealing with values too, right? We see so much more of the value when we interact with people. And certainly just to mention, of course, with Zolidar's approach to technology, we want to be of support to those professionals so that we can help templatize, add efficiencies wherever we can. So now to kind of move to our final phase with some closing thoughts. What would you say is the first step you'd advise an owner to take when they start thinking about an exit?

Michael Kramer (49:05)
I would say, to me the most important thing is figuring out who your stakeholders actually are, who your beneficiaries are, and then thinking about ways in which they could become part of both the decision making about the exit and the future of ownership.

I think sometimes a lot of people don't think about that. And one of the things that I really like about co-ops and some of these other organizations is they involve employees at all levels of the company and having a voice and trying to make these kinds of decisions. So I think owners need to not just think about what's best for themselves. I think it's about what's best for the company. And that means other people need to participate. So that part is really really important. It's not to diminish the needs of the exiting owners. They need to get what they need to get. But if we feel any sense of legacy and a desire to leave what we built in good hands, involve those hands. They're the ones who are going to be taking it over.

And I would encourage people to do it this way rather than to just sell to the highest bidder. It just might ruin everything. And we have seen that. We have seen companies sell and it gets ruined. Because the people who are sold to don't have the same values. They don't have the same sense of what it takes. Or they are trying to apply a formula from some other reality that may or may not be applicable. So anyway, that's my encouragement. That's why I want to see more of these. There's only about 70 or 75 perpetual purpose trust-owned companies in the country right now. It's just in its infancy. And I really want to see more folks take a look at this model because it seems like there's something very meaningful here with this type of structure and I want to help people explore it.

Matthew (51:09)
And certainly, yeah, we appreciate that offer. And, you know hopefully folks will take you up on that. Is there anything else that we should have asked today that I didn't? Or what else would you like our listeners to know?

Michael Kramer (51:19)
Well, I don't know if it's that, I don't know if we danced around it little bit, but this idea of decoupling governance from economic rights is something that I feel is really, really important. And oftentimes they're not decoupled. And I think that can really interfere. So I really feel like when profits serve the purpose, then you're going to decouple those things. And feel like that's healthy for a business, I would really encourage people to think about it in those ways. A business is not really a commodity. You know, it's a living system. And the people who are there are working towards a shared sense of purpose. So we have to act like it.

Matthew (52:02)
Certainly, yep. And all the better the more examples we have to look to. So how can our listeners reach you and what would you like to hear from them?

Michael Kramer (52:09)
That's a great question. I mean obviously naturalinvestments.com is our website and where people can find our team of advisors and also reach out to us. We both invest in alternatively owned companies and funds. We also seek clients who want to do that. So there are lots of ways that people can interact with us. And I'll put in just a quick plug for the Resilient Investor. The book would have been a bestseller had it come out during the pandemic, I think, but it came out well before, but it still has a great way to think, I think, about our lives and our time and our money and our energy and local to global and just it's a really good life planning book so it's something that is a very helpful tool for people to map out their resources.

And we have all kinds of personal and social and tangible and financial assets that can all be engaged. And I think we have a very holistic framework for how people can look at their lives and figuring out where attention might be needed.

So, resilientinvestor.com is another resource and that book is available still to my knowledge everywhere.

Matthew (53:28)
Perfect, well, know, heaven forbid, right, if we have another such similar event like a pandemic, it could be a second edition moment. So who knows, it might come. Well, thank you so much, Michael, and yeah. So much appreciate your time and you know, trying to bring it back full circle. I mean, it's not what you look at, it's what you see. I think I'm certainly seeing how you've taken...

Michael Kramer (53:36)
Exactly. Never say never.

Matthew (53:51)
just the act of investing and just made it so holistic as you said and thought about so many factors and all of the people and all of the systems involved and really remarkable story. So I thank you so much for sharing it with our listeners today.

Michael Kramer (54:03)
My pleasure. Thanks for having me.

Matthew (54:05)
All right, take care.

Matthew (54:05)
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