CEOs of not-for-profits have been talking with me a lot about three matters that are weighing heavily on their minds – financial challenges, regulatory change, and expansion. It is not news that not-for-profits face financial challenges, but the challenges have been gradually exacerbating. They are seeing increased competition for donations, time and attention, and as a result, even maintaining donation levels is becoming more of a challenge. In addition, government funding is getting tighter and when available, cumbersome to obtain and maintain. Costs are rising, but revenues are not.
Not-for-profits in certain fields are facing significant new regulatory changes in addition to the challenging existing regulatory frameworks within which not-for-profits generally already operate. For example, the elimination of sheltered workshops has caused significant disruption for organizations that serve adult individuals with disabilities.
In spite of the challenges and changes, some CEOs are nevertheless talking about expansion and new programs. This isn’t easy, especially when resorting to traditional fundraising techniques. As a result, I’m seeing an uptick in the number of not-for-profit CEOs who are looking for more creative approaches and solutions.
One unconventional approach is social enterprise. For this purpose, think of a social enterprise as an entity or a division within an entity with the goals of making a profit, or using money making techniques, and providing a social or public benefit. A social enterprise can generate income for the not-for-profit while pursuing public benefits that complement its charitable goals. In addition, it can potentially attract investment to help secure its own operations and provide more stable money streams to the not-for-profit — and do so in a less restrictive regulatory environment. Here are four possible avenues to explore:
1. Create a Joint Venture with an Existing For-Profit Entity. A joint venture is a partnership (although typically structured as a limited liability company or corporation) between the two entities for a specific purpose. That purpose might be to expand the reach of one of the not-for-profit’s missions or to take advantage of one of the not-for-profit’s assets. As an example, a university which had summer teaching training programs created a joint venture with a video production company. The joint venture took the training programs and broadcasted them to a greater number of teachers than could be reached with an on-campus program. The profits from the venture were shared by the university and the video company.
2. Create A For-Profit Entity. The not-for-profit might create a new mission driven for-profit entity, such as a benefit corporation. The not-for-profit could own all, part or none of the for-profit. If owned, profits of the for-profit could flow through to the not-for-profit. If not owned, the not-for-profit could have a contract with the for-profit. For example, Greyston Bakery is a benefit corporation which is wholly-owned by the Greyston Foundation.
3. Embed the Social Enterprise within the Not-For-Profit. Rather than create a separate for-profit entity, the social enterprise might be created and operated as a division of the not-for-profit, which was an approach followed by ARC of Westchester.
4. Contract with an Existing For-Profit Entity. The not-for-profit could have a contract with an existing for-profit which includes payments to the not-for-profit for services or products (such as intellectual property) provided by the not-for-profit.
Selecting the best approach will depend very much on the not-for-profit’s goals, mission and available resources, among other factors. It is definitely not “one size fits all” strategy, but as with any new venture, careful planning is key.