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Sustainability: Alternative Sources of Revenue

John Bauer January 14, 2016 blog, News 2 comments
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Aside from cutting expenses and ramping up the traditional forms of fund raising, what alternatives are there for nonprofit organizations to improve their financial position for the long term? Assuming you are willing to step outside the box regarding fund raising and explore other options with an open, growth-oriented mindset, there are a variety of options available to consider. Here is my short list of a half dozen strategies you might wish to explore. Some of these may seem obvious while others would require expertise above the usual intellectual and professional assets available internally to most nonprofit organizations. Nevertheless, some leaders have found ways to exploit these strategies to their benefit, so I’m not suggesting anything that hasn’t already been tried.

Monetizing Existing Fixed Assets. If your organization is property rich and cash poor, you may wish to explore ways of monetizing your real estate. This is particularly true of organizations that have fully depreciated properties that are paid for. Even if you have no desire to relocate, selling such property to an investment firm with the intent of leasing it back from them might be an effective strategy. Firms that manage large pension funds are especially interested in buying property that has cash flowing through it. Group homes, nursing homes, clinics, office buildings, etc. are good investment vehicles for such firms. The advantage to the nonprofit is that it infuses immediate capital into the organization that can be invested, used for needed capital projects, or placed in a fund to subsidize operating losses. It may even be feasible for groups of nonprofit organizations in the same state to pool their real estate assets and form a real estate investment trust (REIT) or a single purpose vehicle (SPV) to buy the properties, manage their upkeep, and return a portion of the revenue stream back to the organization. Senior services organizations have utilized this strategy effectively.

Renewable Energy. This may not be a viable option for organizations that are situated in urban areas, but I know of nonprofit organizations located in rural parts of the country which own land that could be used to support energy production. Whether wind, solar, waste processing, or biomass, there are companies ready to build and manage turn-key operations to produce electricity and/or natural gas. What they don’t have are the tax credits, renewable energy credits (green tags), bond financing, land, permits, suppliers, buyers, licenses and subsidies that are available to nonprofit organizations. So, being able to lease land to developers in exchange for energy and/or a percentage of the net revenues that are obtained from selling power to the grid may be a possible source of revenue. It may be worth having a conversation with an energy consultant. And if access to the energy that is produced is possible, reduced dependency on a large power grid is seen by many as important in times of crisis.

If you are interested, I can put you in touch with an outstanding renewable energy consultant who is a knowledge pioneer in this field.

Supporting Foundation or Endowment. Of course, it would be great to have a supporting foundation which would kick off earnings every year to offset operating losses, pay for improvements, or enhance services. Who wouldn’t want that? But most nonprofit leaders would say that the first priority has to be making sure salaries are paid and that the lights still go on. I get that. But we are talking about long term sustainability here so what I’m suggesting is that you ask yourself what it will take to ensure the future ten, twenty or fifty years from now. Assuming your organization has an active development function that is working with donors, one strategy might be to impose the discipline needed to create such a supporting foundation through a policy that requires all undesignated legacy gifts to be placed into the foundation or endowment fund.

A foundation is a separate legal entity with an independent board of directors. An endowment fund can be governed by the organization’s board but is restricted by policy. Depending on the size of the organization, either option can work. I’ve had experience working with both models. The key is in developing policies that achieve the objective and meet the requirements of the law.

In my humble opinion, every organization without regard to size of budget, should have a fund set aside to support long term viability.

Social Enterprise. Many nonprofit organizations have supported enterprise activities which generate non-operating revenue. For example, who hasn’t considered starting a thrift store or holding an annual garage sale as a way to raise money? However, through personal experience at an organization that had a network of 22 thrift stores around the Midwest, I can tell you that the days of huge profit margins built on free volunteer hours and low overhead costs are going away. Volunteers are aging and the costs of leasing and utilities are shrinking profit margins. Requirements for paid managers, police background checks for volunteers, and the diminution of qualified employees add stress and expense. Unless you have the capacity to go “large scale” like Goodwill, your return may not be at an acceptable level.

What nonprofit organizations might consider as an alternative, is investing in a for-profit enterprise that addresses a particular supply need within the service area and which could channel some of its earnings to the nonprofit as operating revenue. One example comes to mind in which a large, national service provider acquired a manufacturer of adult diapers. Not only was the business profitable, but the agency had a huge on-going need for its product, which it could now obtain at cost. And if employment opportunities are made available for people supported by the organization, well, that’s gravy on the mashed potatoes!

Another form of social enterprise builds on the in-house expertise of the organization. Sharing that knowledge with others through online webinars, videos, and subscriptions to resources has emerged as a very cost-effective way to generate additional non-operating income. Nonprofit human care organizations are required to conduct a significant amount of employee training. Capturing such training in the form of audio, video and print materials that can be marketed and sold online may provide a return from activities that are already a part of doing business. For ideas on how to explore this form of enterprise, I recommend reading Jeff Walker’s book, Launch. (See the reference below.)

A Google search for “social enterprise” will yield a plethora of learning materials, models and resources. I encourage you to check them out for ideas.

Strategic Collaboration. Sometimes, the cost of operating a nonprofit charitable organization is too great for the agency to remain viable in the long term. Numerous factors may contribute to its vulnerability: competition from other agencies, lack of volunteers, increased overhead expenses, increased regulation, diminishing reimbursement rates for services, and geographic constraints. Still, the mission is noble and good work gets done. To contemplate the organization’s demise is almost immoral. If the mission is relevant and the services meet critical human needs at a high quality of service, then leaders must consider those aspects of the organization that are not “mission-centric.” And what are those? How about all the back office operations that keep the place running like finance, HR, communication, maintenance, technology and all the other things that together comprise “administrative expense?”

What if the mission could be sustained without having to support large administrative staffs? Such thinking opens the door to consideration of forming strategic partnerships with other nonprofit (or private or public) organizations. There are a multiplicity of models and options available that range from very informal cost sharing of utilities to creation of a holding company, and all the way to acquisition or merger.  Nonprofit leaders have to at least be open to exploring such options when the very existence of their organizations is being threatened by administrative costs.

However, even if you are open to the prospect of a strategic partnership, don’t kid yourself. There are many forces of inertia that work against such consideration, not the least of which are the feelings of pride, ownership, belonging, identity, and control. Nevertheless, when demise is the other alternative, strategic collaboration must be considered. I would encourage you to at least think about the prospect by formulating a business case for collaboration. Then do a bit of exploring to locate possible organizations that might be approached. Do some initial due diligence to determine if they might be a good partner. Possible partners might be your strongest competitors or they may be private equity firms, insurance companies, or other associations or institutes. Let’s just say that, as we have already seen in the health care field, the possibilities are almost limitless. Only then should you approach “targeted” organizations for exploratory conversations. All this precedes any kind of negotiation.

I’ve negotiated and effectuated affiliations, acquisitions and mergers, both large and small. I also directed the integration of two very large social service organizations. I’d love to explore with you some possibilities that might benefit your organization. For those who are interested in learning more, I recommend David LaPiana’s book, The Nonprofit Mergers Workbook: The Leader’s Guide to Considering, Negotiating and Executing a Merger.  For a much deeper dive into the tactics, techniques and tools for effecting and integrating a strategic partnership, I recommend Timothy Galpin and Mark Herndon’s book, The Complete Guide to Mergers and Acquisitions. (See references below.)

Self Insurance. A significant percentage of every nonprofit’s budget is comprised of various forms of insurance. Health insurance for employees it usually the biggest of these, although liability, workers’ compensation, unemployment, property and casualty insurances also eat up a lot of money. Most organizations look at these as costs. But what if insurance was considered an asset that the company owned instead of a product that it purchased? I know this sounds like a way to reduce expenses, and it certainly is, but if you think about your budgeted amount for insurance as a restricted fund that you need to manage in order to maximize a profit return, well, your mindset will change in many ways. For example, I have observed in companies that do go the self-insured route that they pay much more attention to employee health and well-being and work hard to improve safety in the work place. These are “investment” strategies aimed at growing the asset. They also recognize the fact that the organization now carries the investment risk. You can still use an insurance company to administer the program, but when you are carrying the risk for the growth of the asset, the mindset changes completely.

More and more medium to large sized-companies are self-insuring and are finding considerable savings. And there are an increasing number of options available through firms that specialize in constructing such vehicles without having to look at offshore investment firms to shelter funds from taxes. And you don’t have to be a big company. Smaller agencies can pool resources with other agencies to create their own insurance services. In my experience, however, self-insurance is a very viable method to improve financial sustainability.

It may be that none of these options is possible for you. Or you may be saying to yourself, “I don’t know enough to even begin to think about one or more of these alternatives.” That’s ok. That’s probably not why you were hired into your position. But I would say this, if you are interested in learning more about these or other strategies to promote sustainability, I’d love to have a conversation with you. I have experience in all of them and I have connections to professional resources that can give you answers to technical questions. Hopefully, I can point you in positive directions so you can at least gain a better understanding of what’s possible.

Give me a call. I’d love to help.

References

Galpin, Timothy and Herndon, Mark. (2000). The complete guide to mergers and acquisitions: Process  tools to support M&A integration at every level. Jossey-Bass. San Francisco.

LaPiana, David, (2008).  The nonprofit mergers workbook: The leader’s guide to considering, negotiating and executing a merger. Fieldstone Alliance.

Walker, Jeff (2014). Launch: An internet millionaire’s secret formula to sell almost anything online, build a business you love, and live the life of your dreams. Morgan James Publishing. New York, NY.

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2 comments

Jerome Knapp - September 14, 2016 Reply

Good thoughts, John. I am particularly interested in the social enterprise avenue, but I have to wonder if this is viable only for organizations of a certain size. As I’m sure you are aware, the vast majority of NPOs are quite small. Approximately 76% of registered charities have annual expenses of less that $1 million (66% are under the $500,000 mark). Smaller NPOs are not only resource strapped but also have a difficult time attracting competent and forward-thinking board members and executives. Social enterprise activities, while recognized as being part of the revenue diversity solution, are more or less in the realm of pipe dreams for most NPOs. This is particularly true for established NPOs with established (calcified) cultures, donor bases, and staffs. It almost seems as if, in order to be successful with a social enterprise strategy, smaller NPOs should do so from day one of their existence and existing NPOs should consider spinning off or fostering in-house separate programs that can operate independently of the mothership. The latter is possible through fiscal sponsorship type arrangements. But even that is a bold step for NPOs with the characteristics I cited above.

John Bauer - September 16, 2016 Reply

You make a very good point about the challenges facing small nonprofits. I believe we have been moving into a period of time in which collaboration among competitors is about the only way small agencies are going to survive. Such collaboration doesn’t necessarily require merger, acquisition, or even management agreements. I have seen very successful collaborations around things like social enterprise, professional development, grant-funded projects, etc. Financial sustainability is driving most of these efforts. Some result in formal strategic collaboration, but there are many different ways to work together without compromising mission.

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