Cover Story: Safety Line
What do a nonprofit organization that helps low-income families and a used-car lot have in common? In most cases, not much.
But that’s not the case with Vehicles for Change, a community initiative founded in 1999 that repairs donated cars and sells them for $700 to low-income families in Maryland, Virginia and Washington, D.C.
In its first few years, the nonprofit would take newer or luxury donated vehicles to auction to try to turn a profit. But it quickly realized it wasn’t getting the best bang for its buck, and President Martin Schwartz and his team saw a unique opportunity to generate more funds. Though a little off the beaten nonprofit path, the solution was a no-brainer: set up a for-profit used-car lot.
In 2005, Vehicles for Change launched Freedom Wheels, where it sells donated vehicles (that are deemed to be in good shape) at market rate to benefit its programs. Today, Freedom Wheels accounts for $1.3 million a year, just less than 30 percent of Vehicles for Change’s total annual operating revenue. Without it, Schwartz says, the organization would no longer exist.
Vehicles for Change isn’t the only nonprofit crossing into for-profit territory in search of a way to supplement more traditional fundraising efforts. Far from it. Whether traditional fundraising methods aren’t filling the coffers the way they used to or an organization is expanding and needs a way to support new programs and services, more and more charitable organizations are carving out space within their missions for revenue-generating programs.
And in a time when dwindling government and foundation support, decreased corporate giving, and unsteady individual giving are causing budget shortfalls throughout the nonprofit sector, a fresh, viable revenue source isn’t something to turn your back on.
“Right now in our current economy, I think it’s imperative that charitable organizations look at other avenues to generate money,” Schwartz says. “And the beauty of it is that once you get the venture up and running, you can count on it on a regular basis — as opposed to fundraising, where in a poor economy like today, donations wither and foundation and government funds get tighter and tighter. If you’re only relying on those avenues for funding, you could be in big trouble.”
All about mission
While generating additional revenue is a main motivation for starting an earned-income venture, almost equally important is the mission benefit.
A venture connected to mission allows organizations to offer a wider range of services to new groups, as well as their normal target populations. For example, though Freedom Wheels turns a profit on the cars it sells, the vehicles still only cost $3,000 to $5,000 and are affordable enough for some low-income families. By offering two levels of service, so to speak, Vehicles for Change can assist low-income families as they work up and out of poverty.
“A lot of our families who received a car from the Vehicles for Change program come back three years later and buy a car from the used-car lot,” Schwartz says. “I think that that’s important.”
Atlanta-based Open Hand, an organization that provides home-delivered meals and nutrition education to low-income people with chronic diseases, began a for-profit subsidiary called Good Measure Meals in 2005 in response to requests by nurses and referral physicians for nutritious meals for people who could afford to pay for them.
“We had no real way to do that because we weren’t set up for that,” says Stephen Woods, executive director of Open Hand. “There were so many requests, we thought that there was a market out there for this to support the mission.”
Good Measure Meals provides gourmet-quality meals to fitness-conscious people, diabetics and others with special dietary requirements — and even just busy professionals who don’t have time to shop for food and cook. It’s a win-win in that it benefits the community by providing healthy food for the paying public, and 100 percent of its net proceeds support the organization.
Though it wasn’t a fundraising solution immediately, Woods says that in 2008 Good Measure Meals’ net contribution to Open Hand was $430,000.
“No matter what the source of contributions in the nonprofit sector, those contributions don’t appear regularly like sales do. And so we all experience cash flow difficulty. When a grant’s late, for instance, we manage month to month a lot of times,” Woods says. “But having a revenue-generating business like this, it creates a continuous cash flow that doesn’t really exist in our sector. That’s been extremely positive for us.”
Good Measure Meals also gives the organization opportunities to talk about its mission to a new market of potential supporters. Woods says many of Good Measure Meals’ customers have become passionate supporters of Open Hand and take part in a program that allows them to donate to Open Hand the cost of meals they won’t eat if they’re going out of town. Those donations are treated as cash contributions.
What about taxes?
Mission fit also helps at tax time. If the activities of the for-profit venture contribute to the organization’s mission, it doesn’t have to pay unrelated business income tax (UBIT) on the revenue it generates.
According to Allen Bromberger, partner at New York law firm Perlman & Perlman, which works extensively with the philanthropic community, UBIT is a tax imposed on income from a trade or business that is regularly carried on and does not contribute to the accomplishment of the organization’s tax-exempt mission in an important way other than through the production of income.
“If a nonprofit conducts a business that does not directly contribute to the accomplishment of its tax-exempt mission, it has to pay a tax on the net income from that business at normal corporate tax rates,” he says. “But if the activity contributes directly to the accomplishment of the organization’s mission, it is not subject to the tax. Moreover, passive income, such as royalties or dividends, is not subject to UBIT. And other activities, such as the sale of donated merchandise, activities carried on solely by volunteers or activities carried on for the convenience of members, are also exempt.”
For example, Achievement Centers for Children, an organization that serves children with disabilities, operates two revenue-generating programs: Achieve Consulting, which trains paraprofessionals and teachers working with disabled children; and a high-ropes course it rents out to companies for team-building exercises. (See the Sidebar.)
While Achieve Consulting is directly related to Achievement Centers for Children’s mission, if the high-ropes course starts to drive significant dollars, it might be considered unrelated business income — something the organization might have to consider down the road.
Heather Peeler, managing director at Community Wealth Ventures, a consultancy that helps nonprofit organizations become more self-sustaining through social-enterprise ventures, says that based on a recent survey of more than 1,000 nonprofit organizations, for those with social enterprises, close to 70 percent of the ventures are structured as divisions or departments within the nonprofits. But when the products or services offered are unrelated to the mission, they’re often established as for-profit subsidiaries.
Planning for social enterprises
Starting a revenue-generating venture is not for every organization. But organizations that are ready and go through with the process gain a profitable means of funding and a new way of thinking about themselves. Jean Block, owner of Jean Block Consulting and principal of Social Enterprise Ventures, says an organization should begin with an internal assessment to determine if it — staff, board and management — is ready to invest “in what will be a journey of serious change.”
Though there’s profit to be had in starting an earned-income venture, there are risks. But the risks can be mitigated by proper planning, identifying potential pitfalls and coming up with strategies to address them. Peeler says her firm recommends organizations find the intersection between the following three things to determine if an earned-income venture is right for them:
- Organizational assets. This includes things like the organization’s brand or reputation, and the skills and expertise it has, and looking at the opportunities that these assets present to the organization in the form of a potential earned-income venture.
- Market opportunity. Are there enough customers to sustain the venture? How many potential customers are there, and what would they be willing to pay, etc.? Interview potential customers, check out the competition and get an understanding of the marketplace you’re thinking of entering.
- Organizational capacity. How well is the organization positioned to be successful with an earned-income venture? Does your organization have the ability to, say, process checks and issue invoices to customers? Does it have the capability to manage customer-service inquiries? Does it have an entrepreneurial culture that allows people to take risks and the “organizational stomach,” as Peeler says, to sustain the ups and downs of a business cycle?
Organizations also should ensure that they have the right talent in place to run the venture.
“A lot of organizations think that this is something that the executive director is going to do on the side, and we just know that the executive director is wearing too many hats,” Peeler says. “We always counsel our clients that if the executive director thinks that they’re the one that’s going to be running this business, then they should not move forward. They really need to have dedicated [staff] and sometimes even industry experience to make sure that the venture is a success.”
Though some of the duties of Freedom Wheels overlap for Vehicles for Change staff, and they share a receptionist and office space, Freedom Wheels has two full-time staffers to run it. Schwartz says his organization was lucky in that one of his staff members had been a general sales manager at a car dealership.
“He had extensive car-sales knowledge, so we were very lucky in that we already had somebody on staff that had that information and knew how to do it and was aware of the business itself,” Schwartz says.
Bromberger says that as organizations brainstorm and plan business ventures — whether with the help of a consultant or not — they should at the very least involve an accountant and a professional knowledgeable in business planning.
“Those people will poke. They will probe. They will challenge assumptions. They will point out things that the group hasn’t taken into consideration,” he says.
The biggest success factor is a willingness to come into the process with an open mind and a long-term approach. When done properly, Block says, the process — from brainstorming to planning to launch — can take about nine months. And most ventures take about three to five years after launch to break even. If an organization is in survival mode and trying to figure out how to make payroll in six months, this is not the way to go.
Peeler says a lot of nonprofits right now are struggling with adapting to the current economy and asking her firm if now is a good time to consider earned income. She stresses to them that if the market and organizational capacity are there, it could be a very good time.
“If they’re trying to think more strategically, long term over the next three to five years, ‘How are we going to diversify our revenue, and how do we become more self-sufficient as an organization?’ then yes, this is the right strategy,” she adds.
Because of the length of time until breakeven, it’s vital that organizations set aside enough startup capital. Be realistic about how much money is going to come in from the venture and what it’s going to cost until breakeven. And look at the UBIT question to determine whether or not taxes are going to have to be paid. Though UBIT is not necessarily a bad thing and in most cases won’t jeopardize an organization’s tax-exempt status, it is a cost and needs to be taken into consideration during the planning process because it can make what might seem like a profitable venture unprofitable.
And while some ventures won’t necessarily become profitable from a business point of view, Bromberger notes that if an organization can get a third or half of the revenues for a program earned by the program itself, at least it doesn’t have to raise as much money to cover it, so it acts as an internal subsidy.
One thing’s for sure: There has to be a commitment to success throughout the entire organization, from the executive director and the board of directors on down, even to outside stakeholders — constituents, communities, government officials, donors, etc. Peeler recommends engaging stakeholders, letting them know about the earned-income venture early on, and being transparent about why the organization is doing it and what the benefits are going to be. In addition, support from the board can be vital not only for the different perspective it will bring to the table, but also because board members often are in business or run businesses and might know of people who can be brought in to help with initial planning and/or making the business operational.
A positive side effect of all of this brainstorming and planning is it gets organizations out of charity think and into enterprise think, something Block sees as refreshing. The brainstorming process helps organizations “open the floodgates of ideas about thinking about themselves differently,” she says.
“So many nonprofits are so geared and have been so geared forever to say, ‘We just have to give it away because we’re a charity,’” Block continues. “You can still keep giving it away if that serves your mission, but you also need to begin to think [in a] much more businesslike [way] that says if what you do and what you have and what you know has value, there may be a market for that so you can earn income based on your assets.
“Nonprofits don’t traditionally do that,” she adds. “You know, to stop, step back and do real, honest-to-goodness market research about who out there might think that this is a good idea and who might not. And is the market large enough? And is it the right time? And will it grow?”
For many organizations, starting an earned-income venture is about recognizing that they deliver a lot of value to the community and that just because they’re nonprofit, it doesn’t mean they have to do everything for free. The planning process helps organizations take a closer look at how they’re running their charitable sides, as well.
Woods says creating Good Measure Meals has raised the bar on the quality of the product the organization provides across the board.
“All of this activity results in a better organization for the parent company, ultimately, because it requires that you take your inventory of what your assets are, meaning the quality of the service that you’re providing,” he says. “A lot of times I think that because we’re nonprofit we tend to think that we do the best we can with the limited funds that we have to serve, and that causes issues with quality.
“In the competitive marketplace you don’t have that excuse,” he adds. “You have to have the best that your market can produce and also the most competitive price. So that means you have to have a tightly run business plan, and we typically don’t manage our nonprofit businesses along those standards.”
The process helped Achievement Centers for Children realize it had real dollar value in its intellectual property. “It’s knowledge, and we’ve invested in it over the past decade-plus in seeking out and getting experience and knowledge,” Patricia Nobili, executive director of Achievement Centers for Children, says. “Sometimes our nonprofit sector doesn’t recognize that strength that they have.”
Putting a dollar value on services also has an effect on beneficiaries — and can have an effect on donors, if you leverage it in your messaging. ForFareStart, a job-training program for the homeless and disadvantaged of Seattle, trainees know that every carrot they chop and onion they peel not only provides them training and feeds hungry individuals in the community, it generates revenue for FareStart, which, in turn, supports their training. (Read more about FareStart at in the Sidebar.)
Dan Johnson, FareStart’s development director, says this awareness instills in trainees a feeling of earning their keep, rather than getting handouts.
“There’s an empowerment piece from the client side, and then I can speak as a development guy, the fundraiser, when you talk to donors and you can tell them the story that FareStart is not only teaching self-sufficiency to the people in our program, we are modeling that in our very own business model and that it’s a cyclical and self-sustaining type of model.
Donors just go crazy about that. They love that,” Johnson says. “It’s very easy to tell the story of FareStart by illustrating the fact that the men and women in our program are working incredibly hard, and not only are we relying upon them to train themselves or take advantage of this training opportunity, we’re relying on them to create the product which is turned into revenue which supports our program.”
And for Vehicles for Change, making more money off donated vehicles by selling them from the Freedom Wheels lot rather than at auction means a greater tax deduction for vehicle donors. In fact, Schwartz says, the program generates about double what the organization would get for the same vehicles at auction.
Still, for many organizations, most of which are unaccustomed to focusing on the bottom line in the same way businesses do, charging market rate fees for services can take some getting used to.
“When your mission is to serve and you try to serve regardless of a family’s ability to pay, and all of a sudden now you are saying we’re not going to serve you unless you pay us and pay us at a competitive rate, it is a culture shift,” says Nobili, who was accustomed to sliding-scale fees before venturing into for-profit territory. “We had to talk about it; the board did, our staff did. But it was done in service of the mission, which helps us get by that and get through that. It’s very hard for us still to turn down school systems that we know could use [our services] but can’t pay.”
For this reason, it’s important when getting leadership and board buy-in that everyone is on the same page and comfortable with the organization charging for some of the services it provides. Nobili says she looks forward to a time when Achieve Consulting is doing well enough that it can offer some partial scholarships for services. But she takes heart knowing that the funds generated by the consulting program and high-ropes course enable the organization to improve its services to better serve those with disabilities.
“We want to be true to our mission of serving as many children [as possible],” Nobili says. “When you have a child with a disability, middle-income families can and do go bankrupt. It’s a very costly endeavor here. So we feel passionately no child’s future should be compromised because of their inability to pay, so we thought Achieve Consulting and the high-ropes [course] would help us toward that end. It will not be the single solution; it’s just part of the solution.”
“Nonprofit groups tend to be undercapitalized,” Bromberger adds. “Some of the big ones have reserves and endowments, but the vast majority of groups don’t have anything like that so they can’t finance their own cash flow. They need unrestricted money, and earned income is a pretty good way to get unrestricted money if the group can do it successfully.” FS
Abny Santicola is managing editor of FS. Reach her at email@example.com