It may seem a bit odd to hear about a nonprofit starting a business, but over the last few years these organizations, large and small, have been considering entrepreneurial efforts that advance their missions while contributing to the bottom line.
In Paterson, for example, a United Methodist pastor running a thrift shop decided to take it on the road. Using people from her neighborhood as staff, she did trunk shows in the back of a big truck in the wealthy suburbs surrounding Paterson. Because the trunk shows also served to advertise the shop’s existence, contributions increased, thereby increasing opportunities to earn revenue, and, in turn, providing more jobs for more people. “It comes full circle in terms of what she is trying to do,” says Marion Zajac, director of technical assistance programs at the New Jersey Economic Development Authority.
The reasons for the new interest in for-profit ventures by nonprofits are fairly straightforward, according to Zajac. Grant funding, whether through foundations or the government, is to some extent drying up. In addition, nonprofits have been growing exponentially and, as a result, the competition among nonprofits for existing funds is greater. Finally, foundations are less interested in funding organizations for the long haul. “They want to see nonprofits having some plan to eventually become self-sufficient,” says Zajac.
So many nonprofits are feeling pressed to develop some sort of revenue generator. Then, even if they do need funding down the line, they will not be wholly dependent upon it.
Zajac speaks on “Earned Income Ventures for Nonprofits,” on Wednesdays, October 11 and 18, at 9 a.m. at the Technology Center of New Jersey at 675 Route 1 South in North Brunswick. The classes are sponsored by the Entrepreneurial Training Institute (ETI) of the New Jersey Economic Development Authority (EDA). Cost is $145 per organization. Register online at www.njeda.com.
Nonprofits need to have several things in place before they even start thinking about an earned income venture or, as it is also called, social entrepreneurship:
A strong board. “We like people who are committed to the philosophy of the organization, but also people who understand the expenses coming in and out and have business perspective,” says Zajac. The leadership of the CFO and executive director are also critical.
Risk tolerance. Nonprofits need to understand, says Zajac, that a business venture is not a sure thing. “This thing may not turn a profit immediately on opening, maybe not in three years, and maybe never.”
Appropriate staff to lead the venture. The board must either identify staff within the organization who are going to operate the venture or commit to hiring staff who have the necessary experience to carry it forward.
Strong background in the basics of social entrepreneurship. The organization needs to know what it can expect an earned income venture to yield, and ETI offers a three-hour workshop on “setting the stage” to provide this understanding, as well as workshops and mentoring to help with planning and follow through.
A mission-driven business idea. Any business venture must also be serving the organization’s mission. “It must be mission aligned,” says Zajac, “otherwise they are stepping outside of the strategic plan.” If a nonprofit is just looking to raise money, it would have to watch out for IRS issues.
New Jersey’s Habitat for Humanity, for example, is looking into developing a home maintenance service. The idea is that its client base, which has gained construction skills by building houses, can earn money doing the smaller things that contractors won’t do, like minor painting or repairing a step. Another venture is by 30-year social entrepreneur Ranch Hope in South Jersey, which does job training and rehabilitation for teenage boys who have gotten into trouble. Ranch Hope opened a thrift store where the boys learn the retail trade.
Good business advice. As nonprofits consider for-profit businesses, they have to take care not to endanger their 501c3 IRS tax designations. Zajac says that they need to be able to pay unearned business income taxes, and she urges nonprofits that are starting a business venture to consult with lawyers, accountants, and insurance agents who specialize in this field.
A solid business plan. Once a nonprofit selects a possible business venture, the first step is to investigate its feasibility. Will it have customers? How will it market its product or service? Who are its competitors, both direct and indirect?
A direct competitor is another organization providing the same type of service, for example, another catering operation. But there is also indirect competition for every spending dollar. The organization must assess the mindset of the customer, who is thinking, “If I have $10 in my pocket and am going to spend it, why should I buy your catering rather than spend the money buying something else?”
Savvy marketing. The next step is to understand the financials of the venture. The planners must develop a marketing strategy, including how to build a sales team and get themselves out into the public consciousness. They must also create sales assumptions — so many widgets over a certain period of time at a certain price.
“Many small businesses think if they have the lowest price, customers will come,” says Zajac, “but that is fallacious. They need to differentiate themselves in the marketplace, but price is not the main success factor.”
Creating the business plan involves all of the universal steps for any small business, says Zajac, “getting into the nitty gritty and striving to set yourself up for success.”
Answers to lenders’ questions. With the business plan in place, the nonprofit needs to prepare the pitch it is going to use for lenders. First of all, the parent organization may need to be willing to pledge its building against any financing the business will need. The planners must also determine the following: costs for advertising, how they will measure success, who will operate the business, what the hours of operation will be, what kinds of equipment and insurance they will need, and what paperwork they will need to file with New Jersey and the federal government.
Starting a for-profit venture is a big step for a non-profit, but there is no need to go it alone. ETI provides feedback at every step along the way. Once the plan is done, ETI offers a panel of nonprofit experts — lending professionals, accountants, and lawyers — to assess the plan’s strengths and weaknesses, and suggest ways to improve it. ETI also offers financing programs, and it has a cadre of lenders, including the New Jersey Economic Development Authority, to whom they can refer nonprofits.
Zajac, a native of South Jersey, graduated in the late 1970s from Rider College with a degree in management statistics. She owned a small custom decorating business, which she ran from her home while her children were small. She then moved to corporate, leading international training programs for Mobil for about seven years.
When Mobil left the area, Zajac took a job at the State Chiefs of Police Association, where she developed its West Point Command and Leadership Program. The association had an agreement with West Point to “turn their green to blue,” says Zajac, and they worked with her to create a program to train state police in leadership, decision making, ethics, discipline, and delegating.
She came to the Economic Development Authority because of her combination of training and small business experience. And there was one more reason. “My dad was a small business owner,” says Zajac, “and it was helpful to see it modeled and to understand by watching him how to be an entrepreneur.”