I’d like to see someone trying a version of this, and European foundation owned businesses seem like a decent template. Do those businesses actually win due to charity ownership? If I were an investor or funding allocator, I’d like to see the pitch be much more concrete.
Edit: Brad addressed or clarified most of these points. Leaving it up as a reference, but most people can safely skip the below.
How much are customers willing to pay to buy charity-owned, by sector? The “tie-breaker” framing should correspond with some dollar amount.
My expectation is that commodity consumers and B2B customers are not willing to pay much more. Consumer luxury goods seems like a good market, and we see businesses appealing to charitable sensibilities there already.
Can charity acquirers pay market prices without expecting to profit from multiples arbitrage or synergy?
You suggest LBOs. Is the cash flow going to paying back a huge loan or to charity? I don’t see how it can be both.
You would lose the ability to raise capital in markets. Are we sure we’ll get the same lending terms if we can’t backstop the loans with equity? Probably there are some details about the actual ownership structures that matter here.
As a consumer, would I rather pay a “charity tax” or direct my own charity spend intentionally?
Are the employees you’ll be inheriting actually in the group of employees willing to accept 4-7% lower pay for mission aligned work? Will they leave when you shift to paying below market?
You’re considering “the entire economy” as the scope. It’s good to point at a huge TAM but it’s also more than you need to claim. As an aside, was this written with AI?
You might suggest a specific beachhead (establish a philanthropic search fund or vehicle run by me, Brad West, with $XXX,XXX,XXX in market X in geography Y, with expected returns of z% over time frame).
If you have <20 year AI timelines, is it a good time to buy a bunch of legacy businesses or are there better uses for the money?
Kyle, appreciate the engagement. I think there’s a core misread I should clear up: COA doesn’t require anyone to pay more. That’s the whole point. The thesis isn’t “people will pay a premium for charity-owned.” It’s “at price parity, stakeholders prefer charity-owned, and that preference shows up in conversion, retention, and terms.” You don’t need customers to pay a charity tax. You need them to choose you over an equivalent competitor. The stated and revealed preference research suggests they will. So your concern about commodity and B2B customers actually supports my thesis. They won’t pay more, and they don’t have to. In fact, commodities might be the best for PFG if the business has the capital required, because it creates a differentiator where there are otherwise none. At equal price and quality, preference tips the balance. Even small advantages in win rates compound on thin margins. A business operating at 10% margin that improves by 5 percentage points doesn’t improve profit by 5%. It increases by 50%.
On the acquisition mechanics: yes, you’re buying profitable businesses at normal multiples. The thesis is that charitable ownership improves margins post-acquisition, not that you’re getting a discount upfront. Debt service comes first, charitable distributions come from what remains. If COA improves margins even modestly, the spread over borrowing costs funds both repayment and distributions. Same as any leveraged acquisition, just with a different equity holder. And foundation-owned businesses actually show lower default rates in the data, so lending terms should be competitive or better. The “entire economy” scope follows from the mechanism. The preference operates on profit destination, not product category. And because the preference advantage doesn’t come with a clear operating disadvantage, we’d have to look for when a disadvantage might emerge. This could possibly be businesses like startups, where equity incentives for the key early players might outweigh such an advantage. But in most of the economy, ownership and management are separate. In the lower-middle market, where experimental acquisitions might feasibly take place, the kinds of acquisitions that keep operations in place but change ownership – continuity acquisitions- happen all the time
On the beachhead: agreed, this is what’s needed. I’m working toward a fund structure to do instrumented acquisitions. The goal is generating real data, not just arguing from theory. Section 1.1 of the research compilation has more on the preference research if you want to dig in.
EDIT: Re AI timelines, one of the risks (certainly not the only one) is that it will cause wealth to be concentrated among the owners of capital. Having charities be the holders of that capital is likely a better outcome than a very small group who are accountable to no one.
If you’re interested in the plausible margin effects, sector selection criteria, and financial projects, you can check out the research compilation that I linked to (Section 1 for stakeholder preference research, Section 4 on the effect of parity (no consumer sacrifice) on adoption, and Sections 9A and 9B on sector selection criteria and financial modeling, respectively).
And Claude helped organize and review the draft, but I wrote it.
I’d like to see someone trying a version of this, and European foundation owned businesses seem like a decent template. Do those businesses actually win due to charity ownership? If I were an investor or funding allocator, I’d like to see the pitch be much more concrete.
Edit: Brad addressed or clarified most of these points. Leaving it up as a reference, but most people can safely skip the below.
How much are customers willing to pay to buy charity-owned, by sector? The “tie-breaker” framing should correspond with some dollar amount.
My expectation is that commodity consumers and B2B customers are not willing to pay much more. Consumer luxury goods seems like a good market, and we see businesses appealing to charitable sensibilities there already.
Can charity acquirers pay market prices without expecting to profit from multiples arbitrage or synergy?
You suggest LBOs. Is the cash flow going to paying back a huge loan or to charity? I don’t see how it can be both.
You would lose the ability to raise capital in markets. Are we sure we’ll get the same lending terms if we can’t backstop the loans with equity? Probably there are some details about the actual ownership structures that matter here.
As a consumer, would I rather pay a “charity tax” or direct my own charity spend intentionally?
Are the employees you’ll be inheriting actually in the group of employees willing to accept 4-7% lower pay for mission aligned work? Will they leave when you shift to paying below market?
You’re considering “the entire economy” as the scope. It’s good to point at a huge TAM but it’s also more than you need to claim. As an aside, was this written with AI?
You might suggest a specific beachhead (establish a philanthropic search fund or vehicle run by me, Brad West, with $XXX,XXX,XXX in market X in geography Y, with expected returns of z% over time frame).
If you have <20 year AI timelines, is it a good time to buy a bunch of legacy businesses or are there better uses for the money?
Kyle, appreciate the engagement. I think there’s a core misread I should clear up: COA doesn’t require anyone to pay more. That’s the whole point. The thesis isn’t “people will pay a premium for charity-owned.” It’s “at price parity, stakeholders prefer charity-owned, and that preference shows up in conversion, retention, and terms.” You don’t need customers to pay a charity tax. You need them to choose you over an equivalent competitor. The stated and revealed preference research suggests they will. So your concern about commodity and B2B customers actually supports my thesis. They won’t pay more, and they don’t have to. In fact, commodities might be the best for PFG if the business has the capital required, because it creates a differentiator where there are otherwise none. At equal price and quality, preference tips the balance. Even small advantages in win rates compound on thin margins. A business operating at 10% margin that improves by 5 percentage points doesn’t improve profit by 5%. It increases by 50%.
On the acquisition mechanics: yes, you’re buying profitable businesses at normal multiples. The thesis is that charitable ownership improves margins post-acquisition, not that you’re getting a discount upfront. Debt service comes first, charitable distributions come from what remains. If COA improves margins even modestly, the spread over borrowing costs funds both repayment and distributions. Same as any leveraged acquisition, just with a different equity holder. And foundation-owned businesses actually show lower default rates in the data, so lending terms should be competitive or better. The “entire economy” scope follows from the mechanism. The preference operates on profit destination, not product category. And because the preference advantage doesn’t come with a clear operating disadvantage, we’d have to look for when a disadvantage might emerge. This could possibly be businesses like startups, where equity incentives for the key early players might outweigh such an advantage. But in most of the economy, ownership and management are separate. In the lower-middle market, where experimental acquisitions might feasibly take place, the kinds of acquisitions that keep operations in place but change ownership – continuity acquisitions- happen all the time
On the beachhead: agreed, this is what’s needed. I’m working toward a fund structure to do instrumented acquisitions. The goal is generating real data, not just arguing from theory. Section 1.1 of the research compilation has more on the preference research if you want to dig in.
EDIT: Re AI timelines, one of the risks (certainly not the only one) is that it will cause wealth to be concentrated among the owners of capital. Having charities be the holders of that capital is likely a better outcome than a very small group who are accountable to no one.
If you’re interested in the plausible margin effects, sector selection criteria, and financial projects, you can check out the research compilation that I linked to (Section 1 for stakeholder preference research, Section 4 on the effect of parity (no consumer sacrifice) on adoption, and Sections 9A and 9B on sector selection criteria and financial modeling, respectively).
And Claude helped organize and review the draft, but I wrote it.