Patagonia’s Succession Plan
Patagonia is an outdoor clothing company long-recognized as a leader in sustainability and environmental activism. The owner and founder, Yvon Chouinard, and his family, recently gave up ownership of the company that was founded almost 50 years ago. Feeling “there were no good options available”, a unique exit strategy was devised that has garnered quite a bit of attention.
Dismissing the Traditional Exit Paths
In a letter posted on the Patagonia website, the traditional exit strategies of selling the company or going public were not appealing to Mr. Chouinard and his family. Their concerns with going public were the potential pressure the company would face to generate short-term profits “at the expense of long-term vitality and responsibility”. Selling the company, likewise, would not guarantee the future for his employees and the continuation of Patagonia’s values.
What succession plan was chosen?
100% of the company’s voting stock (2% of the company) was transferred to The Patagonia Purpose Trust. The main goal of this Trust is to “protect the company’s values”.
100% of the nonvoting stock (98% of the company) was transferred to the Holdfast Collective, a non-profit 501(c)(4) that will use Patagonia’s profits to combat climate change.
What is a Purpose Trust?
I have heard of Purpose Trusts in the context of being an option for clients that want to ensure their pets are taken care of after they die. Also called “Pet Trusts”, it is a more expensive and structured option for people that want to go beyond simply naming a caregiver for their pet in their will.
Purpose Trusts can be established to carry out a named “purpose” and they do not need a beneficiary, as is the case with The Patagonia Purpose Trust. For now, the Trust will be overseen by family members and close advisors to ensure it is following its mission of ensuring Patagonia, still a private company, maintains its values.
Why will the Holdfast Collective be a 501(c)(4) versus a 501(c)(3)?
Both organizations are non-profits as defined by the IRS code. A 501(c)(3) organization, such as a charity, is tax-exempt and has strict requirements to maintain that status. A 501(c)(4) organization is a social welfare organization and donations are not tax-deductible unless the organization is either a volunteer fire department or a veterans organization.
Some activities that a 501(c)(4) can do that a 501(c)(3) cannot include:
Participating in political campaigns and elections and
Directly or indirectly supporting or opposing a candidate for public office.
The main objective of the Holdfast Collective is to combat climate change. So clearly, the ability to fund political causes was worth giving up the income tax deduction for the Chouinard family.
The tax implications of the succession plan.
While contributions to 501(c)(4)’s are not income tax deductible, they avoid estate and gift taxes, which are due when the estate value and gifts given are more than $12,060,000 per person in 2022.
The money irrevocably given to The Purpose Trust generated about $17.5M in gift taxes.
Leading by example.
Patagonia has always strived to prove that you can be driven by purpose and be profitable. It will be interesting to watch and see how this strategy plays out and if others will replicate it.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients nationwide and is based in San Diego. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a virtual fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning and ongoing impact-focused investment management. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and its advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.