Tough Economy Offers New Opportunities for Charity-Run Businesses

The tumultuous economy will test the leaders of charity-run businesses in a way they have never been tested before, Kevin Lynch and Julius Walls Jr., authors of Mission, Inc., told participants here at the Social Enterprise Summit last month. At the same time, they said, the downturn offers exciting opportunities.

The annual conference, organized by the Social Enterprise Alliance, in Washington, drew 385 nonprofit executives to discuss how charities can diversify their sources of revenue by charging fees for the services they provide and starting businesses.

Staying on top of businesses’ cash flow is critical, Mr. Lynch and Mr. Walls told the audience.

“If you run out of cash, you’re done,” said Mr. Walls, who is chief executive of Greyston Bakery, a charity-run business in Yonkers, N.Y., that provides employment to people who are recovering from addiction, returning from prison, or have other problems that make it difficult to get a job.

Rebuild Resources, a screen-printing business in St. Paul that employs people who are recovering from substance abuse, a few months ago instituted pay cuts to curtail expenses during a tight period.

But the pay cuts were driven by the values of the charity that owns it, said Mr. Lynch, the charity’s president, who took a voluntary pay cut of more than 30 percent.

“That’s where the money is, in the higher salaries,” said Mr. Lynch. “So if you want to actually affect something, you have to go to the people who are paid the most.”

Other charity staff members took pay cuts that were tied to the size of their salaries, with employees who made the least money taking a 5-percent cut. But the hourly workers in the charity’s business were not asked to take a cut.

“Economically, they simply couldn’t sustain it,” said Mr. Lynch. “But more importantly, that is where the rubber hit the road for us on mission, and what we wouldn’t compromise on.”

As difficult as the challenges facing nonprofit business ventures are, there are also new opportunities, Mr. Lynch and Mr. Walls told the audience.

“Now this sounds really cold-hearted and cold-blooded, but during tough times, there is a culling of the herd,” said Mr. Lynch. “It happens in nature, and it happens in business.”

When weak businesses go under, stronger ones need to go after the customers and market share that are up for grabs, he said. Plus, he joked, a recession is a good time to go shopping.

“Be on the lookout for deals for equipment, for raw materials, for inventory, for people, even entire businesses,” said Mr. Lynch. “There’s going to be fire sales.”

Five states and one Indian nation have passed legislation recognizing a new type of business that puts its social goals ahead of making money.

In the year since Vermont became the first state to recognize the low-profit limitedliability company, or L3C, Michigan, North Dakota, Wyoming, and Utah have all followed suit, as has the Indian Crow nation.

The new for-profit designation is designed to make it easier for socially oriented businesses to attract program-related investments from foundations and additional money from investors.

Too often, foundations feel they have to go through the lengthy and expensive process of getting a private-letter ruling from the Internal Revenue Service each time they want to make a program-related investment in a for-profit business that has a social mission, says Robert M. Lang Jr., who developed the new designation and is leading the effort to promote it. He is also chief executive of the Mary Elizabeth & Gordon B. Mannweiler Foundation, in Cross River, N.Y.

He hopes that the L3C designation will become a recognized “brand” that allows foundations to feel comfortable making a program-related investment without a private-letter ruling.

Mr. Lang and other proponents say that businesses operating in a state that has not passed L3C legislation can seek the designation in one of the states that has.

Rubicon Programs is often held up as a model of what a successful nonprofit-run business looks like.

The San Francisco Bay Area charity operates two businesses — a landscaping and grounds-maintenance service and a bakery — that generate about $18-million annually and provide training and employment for roughly 250 people who are poor or have disabilities.

But for the last several years, Rick Aubry, Rubicon’s longtime president, began to question just how successful the organization’s efforts were, he told participants at the Social Enterprise Summit.

“Given all the time and energy and sweat and worry that we’ve had, has all of that been equal to the impact that we’ve had?” he said. “And I came to the conclusion: maybe not.”

With foundation grants, Mr. Aubry and several other Rubicon employees have been able to step away from the day-to-day operation of the organization to think about how to create a business that could operate nationally and to investigate business opportunities.

The group, said Mr. Aubry, tried to answer several questions: “Are there business opportunities that exist that a nonprofit or a hybrid has a competitive advantage in achieving, that scales, and that we could get the capital we need?”

After interviewing scores of nonprofit leaders who run businesses, researching a wide range of possible businesses, and doing in-depth feasibility studies on several ideas, Rubicon National Social Innovations, as the effort is known, has identified two businesses that it is now developing: mattress recycling and an employer-based payroll-advance service that would be an alternative to exploitative payday lenders.

Rubicon is already working with nonprofit organizations in San Jose, Calif., to test the mattress-recycling business, and plans to start another test in Philadelphia in a few months.

Read more Chronicle articles from the social-enterprise meeting at http://philanthropy.com/news/conference.