How to Get Your Nonprofit Board on Board With Your For-Profit VentureDecember 9, 2013 by Janna Finch
Staying operational when donations and grant funds are down is a common hardship many nonprofit organizations (NPOs) face. According to a Nonprofit Finance Fund survey, 41 percent of NPOs ran a deficit in 2012. To combat this, many NPOs are adding for-profit ventures to help provide consistent revenue streams. In fact, over 50 percent of NPOs currently operate under a hybrid business model, which is up from 37 percent in 2006.
This article explains how to accomplish one of the most important steps in making this transition: convincing your organization’s board of directors that going hybrid is a smart decision.
Choose a Venture that Complements Your Mission
One of the board’s top responsibilities is to make governance decisions that align with your nonprofit’s mission and purpose. To show that a for-profit venture won’t cause mission drift, choose a business that compliments your organization’s established goals. For example, opening a for-profit bakery is illogical for a nonprofit focused on whale conservation, as bakery operations clearly don’t align with programs aimed at protecting whale populations.
For an organization on a mission to reduce hunger, however, a bakery could be a practical venture. A bakery produces food that can feed hungry people, and can create employment opportunities for the low-income individuals the organization serves, helping them gain financial independence so they can feed themselves. At the same time, profits from the goods sold can fund the nonprofit’s charitable programs.
Martin Schwartz, founder and president of Vehicles for Change in Halethorpe, Maryland, says choosing a complementary for-profit business was a must when he convinced the board to launch a used car dealership, Freedom Wheels, in 2005.
Vehicles for Change was already in the automotive business, so opening a dealership was a logical choice. The organization accepts donated vehicles, which they then repair and award to eligible families to help them achieve economic independence. Freedom Wheels created a channel to sell vehicles for a profit, which is used to benefit Vehicles for Change’s car ownership and auto technician and mechanic training programs.
Since the used vehicles sold are low-cost, they’re affordable for many low-income families—the population the nonprofit serves—meaning the business helps further Vehicles for Change’s mission. Because a dealership was a logical for-profit addition to the nonprofit, the board approved Schwartz’s request to start it.
The dealership was a success, and now the organization plans to open another for-profit venture: a 12-bay repair garage business to serve the public. It will provide employment opportunities for training program participants while serving as another revenue stream to support the organization and help advance its cause.
“It’s important that your venture ties as closely as possible to the mission,” Schwartz explains. “You have to consider how the general public is going to view the for-profit venture in conjunction with your nonprofit, so it has to make sense.”
Provide Financial Details to Show Risks and Costs
Most nonprofit board members already understand that operating on grants and donations alone is a risky venture, but may nonetheless balk at investing finances to start for-profit ventures. To instill confidence and gain their approval, you should present solid financial information and forecasts detailing the costs to launch the business and how you expect it to contribute to your organization.
Maureen Beauregard, president of Families in Transition, did just that. She says there was a lot of trepidation among her organization’s board when she first suggested opening a for-profit thrift store. However, she knew that if funding and donations decreased, Families in Transition would be in danger of closing, so she outlined a plan that illustrated how integral the business was for the nonprofit’s financial security.
The board agreed to take a calculated risk, but wouldn’t allow the nonprofit to acquire any debt. This was a challenge for Beauregard—she couldn’t apply for a loan, as is common when starting a business. Instead, she managed to secure a $300,000 grant from a foundation that was investing in social entrepreneurs, which was more than enough to start the thrift store.
Beauregard showed her commitment to fiscal responsibility in the finer details as well. She calculated that the rent for retail space would be $90,000 a year, so she suggested it would make more sense to purchase and develop a property at a cost of $30,000 per year instead.
This freed up $60,000 each year to cover other business costs, such as employee payroll, health insurance and building maintenance, or to use for the organization’s programs. This shortened the timeframe to profitability and turned a liability (rent costs) into an asset (property owned) that helps the organization’s bottom line.
Convinced by the financials that venture was a good idea, the board approved and the thrift store was successful. Families in Transition has since rolled out other for-profit businesses, including a second thrift store, all of which are self-sustaining and have no debt.
Tap Experienced People to Lead the Venture
Board members also need assurance that the for-profit venture will be driven by experienced professionals.
Schwartz explains, “Many nonprofits are run by program people who don’t necessarily understand the business side of things, so it’s important to hire someone who has actually run a business and understands all the nuts and bolts of getting a business off the ground. Someone who has startup experience, who understands the dedication and persistence required to successfully launch a for-profit business, could be a good choice.”
Astrid Scholz is the president of Ecotrust, an organization working to create resilient communities and ecosystems through a natural model of development. She determined that there was a global need for a program that would develop processes to help decision makers design in marine-protected areas.
In 10 years, the program transitioned from being underwritten by grants to accepting contractual and fee-for-service projects. Scholz believed turning it into a standalone for-profit business would be the best way to provide the structure it needed to continue growing and meet the needs of clients.
The board’s approval of the startup was contingent on finding a person capable of running it. In her search for a CEO, Scholz looked for someone that had both startup experience and a track record in a technology-oriented field. When she found a qualified leader, the board gave Point 97, which builds tools for data collection and marine planning, the go-ahead.
When Vehicles for Change established Freedom Wheels, the person Schwartz tapped to lead the charge had extensive experience working in automotive dealerships. His understanding of the business was reassuring to the board and an important factor in getting the venture approved.
Similarly, Families in Transition’s Beauregard hired a site supervisor with proven management experience to oversee operations when they opened the thrift store. She says that when you’re starting a new business, having someone with experience under their belt is essential, as there’s no room for error in a startup.
Overall, it’s important to be pragmatic in your approach when presenting your idea for a for-profit venture. Choose a business that aligns with and furthers your organization’s mission, create a detailed plan that explains how it will benefit your nonprofit financially and ensure you have the right leadership in place to run the venture. By showing board members the plan is both feasible and supports your nonprofit’s cause, you’ll provide them with the information needed to gain their approval.