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Building Value Through ESOPs and Long Term Strategy with Thomas Mallon of Perpetuate Capital 12-2-25
00:22:02
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- [00:00]
A
This is Scott Becker with the Becker Business, the Becker Private Equity podcast. We try and bring you brilliant business leaders in an efficient format every day. Today we're thrilled to visit with Tom Mallon. Tom's Harvard Business School graduate. He's the founder of a company called Regent Surgical Health, which he founded and ran for I think 15, 20 years. Incredibly successful, had an exit with that. He then became involved. I'm not sure. He founded or co leads a company called Perpetuate Capital and, and he's been very involved in Perpetuate Capital since and has been really successful with that. We're thrilled today to get to visit with Tom about both his history as a leader in Perpetuate Capital. Tom, can you take a second to introduce yourself and tell us a bit about yourself, your background, and quite frankly about Perpetuate Capital.
- [00:50]
B
First of all, Scott, I'd like to thank you for inviting me to be on your podcast. We've had an amazing friendship and you've been a valued counselor and wise counselor for so many years. It's a thrill for me to be here. Perpetuate Capital really evolved from the experience of exiting Regent surgical health. In 2015. We went through traditional exit process of hiring a banker, looking at strategic exits, looking at private equity funded buyouts. But Chris Bishop, our CEO, and Matt Lau and myself decided to look at the ESOP exit where we would create an employee trust, a trust for the benefit of the employees. And that trust would leverage up and do a leverage buyout of the founders. And that experience was such a great experience for the next four years. We had so many benefits of the esop. Everybody wants to work for an employee owned company. We recruited way over our skis. We needed additional talent. We didn't lose any of our valued people. And at the end of the day, we created 13 millionaires out of 42 employees. And it was just an amazing experience.
- [02:16]
A
That's remarkable. Take a second, Tom, on the original vision for Perpetuate and I know how it sort of evolved from your experience in having an ESOP with Regent. Talk about how you've evolved and got deeper into this.
- [02:31]
B
Okay. ESOPs tend to be have multiple financing levels. If it's 100% ESOP, it's 100% leveraged. We ran Regent for 15 years with no leverage, no debt at all. But to create an employee trust, you basically use senior financing with a commercial bank which has fairly low interest rates. ESOPs don't have to personally guarantee the senior debt and that's two to three times ebitda. The Sellers generally have a financing part in the sale. So seller financing with ESOPs is usually the majority of the financing. If a company like ours has steady, steady revenue and steady earnings growth, you can put an additional debt in the middle. It's traditionally called mezzanine financing, mezzanine capital. And so we looked at, we had, our sellers were willing to finance 25%. The bank was willing to 25%. We had a middle piece of 50% that we didn't know where it was coming from. We went to the market to do mezzanine finance and, and we got three or four bids. All look the same. They were 12% current interest with, with amortization day one, 2% accrued every year to total 14% interest plus 30% of the upside. As, as sellers, we were willing to do 8% with whatever the trustee would allow us in warrants in the, in the, as far as the growth of the company. I received several angry calls from doctor Partners who were angry with us that we weren't opening this investment up to our doctor Partners. And I said, well, this is what the sellers are willing to do. Would you be willing to do the same? They said, absolutely. We trust you guys. We don't want you to sell to a public company where you're going to change everything. We want you to do exactly what you're doing for us for the foreseeable future. So I went out and I talked to our doctor partners. I ended up talking to 72 of our 400 partners, 42 of those invested in the company to fill in that, that middle gap between the seller financing and the senior lender. And that made the deal happen. And we couldn't have done it with a traditional mezzanine capital. So when after we closed the company then resold four and a half years ago, we got all this money back from the sale, our original investment plus the warrant capital. And we had no place to invest it profitably. So I talked to the doctor Partners and I said, would any of you like to join me in finding reasonable ESOP companies to invest in like Regent so that we can continue this? And they all said yes. So, so we basically come in at we don't have to have amortization day one. So that gives the borrowing company room to grow into the financing that it's now had to take. We operate at 8 to 9% versus 12 to 14%. And the warrant income from our loans will protect us against inflation. So that's really why we started perpetuate capital. And it was a basic need to Replace the great investment we had made in region.
- [06:18]
A
That's fascinating. And for as much as I was involved in Regent with you and sort of the board with you, I don't know that I fully understood it as well as I know understand what you're explaining and totally fascinating. Tom, talk about, in today's world, there's so much discussion about boomers looking to exit their businesses or getting to that spot where they got to turn it over to their children or exit to do something. Does that mean that there's lots of founders and companies that are out there looking for this type of opportunity today? What does that look like?
- [06:49]
B
There's supposed to be $13 trillion worth of equity in mid cap companies that are owned by baby boomers. Even if they're selling to their kids, they need money to retire. And so the ESOP is a great alternative for these transitions. The problem has been that most ESOPs have been historically done with senior debt and seller financing. And if you compare that to a private equity deal or even especially a strategic deal, the, the cash at close is much less than those kind of transactions. But with an ESOP with Perpetuate Capital money in the middle, it's about the same. Plus the seller keeps to stay in and control the board as a board member or chairman of the board and they can recruit their own successor and they can watch over the company until their seller financing is paid off. So that's the magic of what we do and what we enable the sellers to do, you know, that isn't available to them with traditional mes capital.
- [08:08]
A
Fascinating. And you played a huge role in building Regent Surgical Health. What are a couple lessons from region that shape your view of business today in investing and building with Perpetuate today in just general business lessons from your Regent experience in building Regent.
- [08:28]
B
I think the similarities between what we do today and what we did at Regent is the long term nature of the marketing effort with Regent. We'd go to your conferences, we'd meet new prospects, we'd go, we'd do an analysis for them and they would look at us and they would say yes, we want you or well no, we don't want you. And that was, that was fine. But then two or three years later you get a call from them and say, well, we said we didn't want you three years ago, but now we need you. So can you come in? Well, what Perpetuate does is we'll meet a company and they'll be, they'll say we're considering a, an esop, but we don't know compared to everything else that's out there. So they will hire us for a 30 day fee feasibility study and we will show them exactly what an ESOP would look like next to a strategic sale or a, a private equity deal, what they would have at, at closing, what the employees would earn over the term of the esop and then they can decide whether they want to do it then or not. But we also, with that we'll point out that the weak spots, because all these private companies, mid cap companies have weak spots. It's either finance, it's either there's something going on that prevents them from getting full value for their decades worth of work. And a lot of them will say, well, yes, we want to do this, but we want to fix this first. So we have done over the last two years about 20 feasibility studies and we know that of those 20, a handful of them, we've closed one transaction. But a handful of those are coming in this coming year, this 2026, because they fixed the things that they needed to fix during that season. So it's a very similar marketing approach and a long term marketing approach to the surgery center business. Keeping in touch with people, not pushing them to do something they're not ready to do, just letting them, giving them the information and letting them stew on it for as long as they need to stew on it. That's, that's what we do.
- [10:47]
A
Thank you. You've seen several different cycles in both healthcare services and private equity. Certainly services has been up and down and fascinating. How does that experience of seeing different cycles shape the way that you think about risk valuation and structure in today's world?
- [11:05]
B
Okay. We started looking at businesses in 2021 and the valuations were stupid. They all wanted the 2019 valuations and we couldn't make any sense out of them in a debt transaction. However, today it's a little bit different. People's expectations have come down, they've been disappointed, they've heard some horror stories about private equity deals gone bad, strategic deals that have been, that have not respected the culture and the employees and the customers so that it's a different world today. And you mentioned healthcare. The valuations on healthcare businesses is now well within the strike zone of what we need in order to lend into them. Healthcare still has that stable revenue and growing income in many little niches of healthcare. Healthcare is such a huge part of the economy. There's a ton of little areas in there. And we've looked at, you know, one particular business we're interested in is a, is a telehealth business. Massive opportunity in telehealth going forward. And if you have the right operator and the right values in the, in the organization, the right people, that can be a very, very compelling investment case. We're also looking at the oil fields. That is an industry that the banks have almost destroyed. And there are niches in the oil field that aren't tied to the number of, of drills out there. There are, well, enhancement opportunities. There are, there's a lot of manufacturing that goes into replacement parts for wells. There's, you know, so there's, there's interesting. And the valuations there are very, very low because of the prior administration's attack on, on carbon and on, on the oil business.
- [13:10]
A
Fascinating. Take a second, Tom. The. Are there particular types of partners or founders or companies that you have perpetually like to partner with? What sort of. Is the right type of target, the right type of company for you to work with?
- [13:26]
B
Well, a lot of ESOPs will get done with only seller financing. And those businesses are like architectural firms and construction firms where the opportunity to sell at high valuation is little to none and the income is up and down and a seller can, can work with the company in its down cycles. But if a company is going to bring in outside capital like Perpetuate and be able to service that debt over and above their senior debt, they really have to have that steady income and growing profits and it has to have a strong culture and customers that love them, that think that they're, they're the best things since sliced bread. And you know, between the employees and the custom customers, that's really what makes the opportunity.
- [14:21]
A
Thank you. So the company was steady income, not huge ups and downs. They could withstand the added debt they often didn't have before. Just like Regent, there was no debt until you ultimately did a transaction and had just a great experience with the esop. So give me that stat again about out of the X amount of employees, how many became millionaires? Many of those were people making nice incomes. 50 to 100,000 a year, you know, that were not in the C suite. Talk a bit about how many people became millionaires out of Regent with the ESOP strategy that you ended up using.
- [14:54]
B
So Regent's biggest employee cluster were billing and collecting people primarily, you know, Hispanic ladies who generally, you know, some of them were single moms, but they were just terrific people and were with us for 8, 10, 15 years and they made, you know, 50,000 a year, very happy. You know, we had just a terrific team that provided that service. Those women, if they were with us from the beginning of the ESOP till the end, they ended up with between 4 and $600,000 deposited in their IRA accounts. Anybody who made over $100,000 became millionaires. And we had one lady who she was, she was our head of contracting and she was a well paid employee, but she had a disabled daughter. And after the deal closed and she got, I think it was $2.1 million, she sends me an email that said that she now will not have to worry about who takes care of her daughter after she's gone. And she will have the funds for her to be in a good group home and not be a ward of the state, basically, which was terrifying to her. This lady has since died of breast cancer. And those kind of outcomes you can't minimize. I mean, they're just life changing.
- [16:30]
A
That is truly a beautiful story. Tom, I'm going to ask you one more question. And Tom went to Harvard Business School. He was tremendously successful before he founded Regent, Incredibly successful with Regent Surgical Health, and now incredibly successful with Perpetuate Capital. Any advice that you'd give to young entrepreneurs, young business leaders, any couple pieces of wisdom or advice.
- [16:54]
B
I think that getting out there and just doing things, getting started, I mean, the hard part for young people is just getting, getting their foot in the door. I think getting your foot in the door, no matter where it is, will expose you to opportunities and what you then need to do. For example, when I first started in the surgery business, we had 25 east, same day surgery. Scott, you remember that, that little surgery center? Well, 100%. I'm, I'm, I'm, I'M about 10 years out of business school and I am working as an administrator for that surgery center. It was the only one we had at the time. And I'm taking care of, helping, taking care of patients. And as I'm holding a barf bag for a patient, getting them into their car, because back then we didn't have good anesthesia, so everybody got nauseous. I'm, yeah, I have my scrubs on and I'm thinking, I'm probably the only Harvard Business School graduate in the world today that's holding a barf bag for somebody to get them into to get them home to recover. You just have to be willing to do whatever it takes and then keep your eyes open for problems that you can solve. Being of value to, you know, your employer, your, you know, the market, whatever that is. That is really the magic of it. I saw the Problem with surgery. That's what got me excited about the surgery center business is that I didn't think the hospitals were doing a very good job of it. And the reason I knew that is because all the doctors told me they were not doing a very good job of it. But then when, when I, we sold our surgery business finally and I saw that the problem with financing these, these small mid cap companies with the MES community, I thought there's gotta be a better way to do this because there are investors who will live less and still be happy and still be protected. And so there's no, I didn't think there was any better lending opportunity than an employee owned business. And that has, that has turned out to be very true.
- [19:08]
A
That is really remarkable what you've done. And let me ask you another question, Tom, because you and I are not big leverage people. And we understand the benefits of leverage, we understand the negatives of leverage. Give us some of your good stall thoughts on leverage today. I mean I see it all over the place obviously. You know, I share a similar view that the country has too much debt. We by nature are fairly conservative financially. Talk a little bit about the use of leveraging business and any just thoughts on it, if you don't mind.
- [19:41]
B
Sure. I hate debt. And what I realized with Regent when we became 100% leveraged versus 100% non leveraged was that when you become an EOP, there are two major tax advantages for the company going forward. You become a qualified pension plan. You're like an ira. You don't pay taxes on your IRA till you take your money out. The company no longer pays federal income tax. So 40% of our profits every year were going to Uncle Sam instead. Those paid down our debt and in two and a half years we paid down our seven year note to our senior lender because of all the money that came in that we didn't have to pay to the federal government. So that's what makes me excited about lending to these companies. It's, we're just substituting federal income tax for debt repayment. And this really builds the equity value for the company which then increases the value of our warrants when our loans are repaid. The second big tax benefit is when a seller sells to an esop. When an owner sells to the esop, he can reinvest his proceeds in stocks and bonds of US Companies and not pay capital gains tax. And when you compare that to, you know, a private equity deal, that's compelling and that's what usually puts us over the hump when it's when we're compared to a private equity deal. And then that's why the senior lenders don't require personal guarantees from ESOPs because they don't have to pay taxes and they can service their debt easier.
- [21:31]
A
Makes it a little bit easier, and it makes a little bit more rational and allows an exit and allows the employees and the ownerships to stay very, very involved. Tom Mallon is, is, is Tom Yellen, who's joined us today. Founder of Regent Surgical Health, Founder, Perpetuate Capital, one of my closest business colleagues, a mentor to me. Tom, we are so thankful to have you on the Vector Private Equity and Business Podcast Day. What a pleasure to visit with you. Thank you so much.
- [21:57]
B
Thank you, Scott. I appreciate the opportunity.