*With thanks to the Decembrists, whose song January Hymn has been brightening my days.

It is day two of the new Administration, and hope is in the air. Despite the events at the Capitol on January 6, we had a peaceful transfer of power yesterday, and action on the coronavirus is coming.  Many nonprofits will be able to take advantage of another round of PPP and EIDL loans, giving their organizations more time to plan for revenue in a post-pandemic world. 

My advice is that nonprofits explore earning income as one component of their new revenue generating strategies.  My December blog defined and gave examples of nonprofit earned income.  This month, the blog gets more practical, guiding you through some of the issues you might consider as you contemplate what earning revenue for your nonprofit would entail. 

What if you are just starting your nonprofit?

The ideal way to start down the earned income path is to think about it when you launch your nonprofit.  Jessica Cavagnero, a partner in the nonprofit consulting firm SeaChange Capital Partners, says “…the most successful organizations have considered earned income up front as part of their strategy and have always thought strategically about how to keep it core to the organization.” 

An excellent example of earning income from the first day is Inclusion NextWork, a nonprofit focused on empowering and training the next generation of leaders in diversity and inclusion.  The organization grew out of a two-day, volunteer-led conference that brought together 60 emerging leaders.  The Chronicle of Philanthropy had just received a grant for diversity work, learned about the conference and hired INW to help with a diversity plan at the Chronicle.   In its first year of operation, INW has received almost exclusively corporate support and is only now focused on building a contributed revenue stream. 

What if your nonprofit is not new?

Unlike INW, most nonprofits have been in existence for a long, long time without contemplating earned revenue.  Here are a few things to keep in mind as you start your established organization down an earned income path.

Prepare a business plan

Make sure to have a process and business plan in place for the new venture before you start.  This would include:

Investment required over a defined period of time—almost certainly more than a year

Benchmarks the strategy must achieve to be renewed

Staffing plan for the venture. 

The bottom line: You must resource your earned income projects appropriately, with people and non-personnel dollars.  You may need to lose money for a defined period of time, as a business would if it were investing in a new product or service. 

Consider creative ways to fund the plan

You may be able to raise funds from a foundation or a major donor for your earned income pilot.  Philanthropic Investors often find these types of projects sexy, especially if the donors come from the business world.  And donors love the idea that you may eventually not need them as much as you did before you started earning income.

Be willing to exit.

Be willing to stop exploring earned income if the numbers don’t work out over time.  We all want to believe our projects will be successful, but sometimes they aren’t.  You will almost certainly learn a tremendous amount through the process, even if you decide in the end that contributed revenue is not the way to go for your organization—for today.

MacKenzie Scott’s latest $4 billion in gifts notwithstanding, nonprofits are struggling to make ends meet as the pandemic drags on, and the economic devastation in its wake continues. We all hope that the federal government will provide more relief for all sectors affected, including the nonprofit. Whether that help comes or not, one area many nonprofits should explore further in their quest for revenue—in the medium and long term—is earned income.

In this first of two blogs, we explore what constitutes earned income in the nonprofit world and give examples of different types of earned income. In the second, we will lay out some of the steps your organization might take as it considers whether to embark on an earned income strategy.

What do we mean by earned income?

Let’s define our terms. What exactly do we mean by nonprofit “earned income”? Earned income is revenue generated from the sale of goods, services rendered, or work performed. Such income falls into two categories: related business income and unrelated business income.

Related income is income that is closely tied to your mission. A good example is Girl Scout cookie sales, which help girls learn about finances and entrepreneurship. Unrelated income is income that is not tied to your mission. A good example is a church that notices that their building is close to a new sports stadium. They decide to sell parking during events. Since selling parking spaces is not directly related to the mission of a church, the proceeds from the activity would be considered unrelated business income.

The key difference between related and unrelated business income is that the former is tax free, and the latter is taxed. Nonprofits can generate up to 20% of their income as related business income without incurring tax and/or triggering any challenges to their nonprofit status. If you are contemplating generating more than 20% of your income as related business income, please consult an attorney specializing in nonprofit tax law.

What are the categories of earned income?

We can identify three or four types of related earned income.

1. Selling your organization’s technical expertise. A great example of this is SeaChange Capital Partners, a nonprofit consulting firm that helps nonprofits navigate complex challenges. Most of the organization’s practice is pro bono, but it takes on three to four paid consulting projects with foundations and a few nonprofits. These projects are laboratories for learning that can then be applied to the rest of the practice.
2. Licensing a product your organization has created for its own use. A great example of this is CoPilot, a student information system for advisors and counselors, developed by College Forward, a near-peer coaching organization that pairs recent college graduates with students to empower the students to achieve their post-secondary goals. College Forward licenses CoPilot to colleges and universities.
3. Training and employing your clients to make products for sale. Alpha Workshops is a terrific model for this type of earned income. The organization is the nation’s first nonprofit providing decorative arts education and employment to adults with visible or invisible disabilities. The founder, Ken Wampler, had been working with Bailey House, an AIDS service provider, during the crisis of the 1980’s and early 1990’s. He observed that people with AIDS were facing severe employment discrimination. Using his background as a decorative finishes artisan, Ken conceptualized a school where people living with AIDS could be retrained as artisans and a workshop where graduates could be employed to create wallpaper and furnishings for top-flight interior design commissions.
4. Selling products related to your mission. This is the classic Girl Scout cookie program, begun in 1917, only five years after the Girl Scouts was founded, by a troop in Oklahoma that wanted to raise funds for its initiatives.

In many cases, the lines blur among these four categories, but the examples are instructive and may stimulate creative thinking for you and your team.

Stay tuned for my second blog on earned income, coming in January. Happy Holidays to all, and may 2021 be a brighter, healthier year for the planet!

June 2020

Since the Great Recession, nonprofit gurus have talked and written with increasing urgency about the need for nonprofit mergers and acquisitions.  These experts cite the large number—over 1.5 million—of nonprofits in this country.  They talk about the possibility for confusion among donors trying to choose among organizations with similar-sounding missions.  And they bemoan the hesitancy of both funders and nonprofits to talk frankly about the benefits of close collaboration, which often cannot take place without support and funding from a third party. 

Until now, the hand-wringing of these experts has not produced a marked acceleration in the rate of nonprofit mergers and acquisitions in the United States, even though a large number of nonprofits perished in the aftermath of the Great Recession.  Now, as the lasting effects of the coronavirus pandemic on nonprofits become apparent, it is time for nonprofit executives and board members to discuss seriously with their funders about the benefits of shared services and mergers.

Assess Your Challenges

Research shows that while nonprofit executives understand and appreciate the benefits of close collaboration, funders have often supported shared programs, encouraging these initiatives for a couple of years and then moving on.[1]   Strikingly, foundation executives express interest in closer collaboration but are afraid to seem pushy or overly prescriptive in their interactions with grantees.  Clearly, we need a meeting of the minds about mergers and acquisitions, as nonprofits, particularly smaller ones, struggle to survive the effects of the pandemic and the economic hardship in its wake.

Recently, a number of colleagues have asked me for a roadmap that nonprofit board and staff members can use to assess the feasibility and desirability of close collaboration with another organization.  This endeavor takes much time and thought, but here is a high-level outline. 

The place to start is always a larger organizational conversation about strategy and options.  A good question to ask is: What are our biggest challenges? And then list them……

Here are some examples:

1. Raising enough funds this year to meet our payroll
2. Growing our impact
3. Staying relevant in an increasingly crowded field of similar nonprofits
4. Finding enough qualified people to deliver our services

Financial considerations often drive merger and acquisition discussions but should not be the sole criterion.  Most nonprofits face myriad challenges most of the time.  This has never been more true.  Whether hibernating or delivering reduced services, many nonprofits are struggling to survive or will be when their PPP and EIDL loans run out.

Consider the Options

This struggle may require drastic action, such as restructuring or even dissolution.  However, if you have enough runway left to consider other options, please take a look at shared services or mergers.  SeaChange Capital Partners has identified four stages on the continuum from less closeness to more:

• Associations, including coalitions and collaboratives
• Joint programs
• Shared support functions
• Mergers and acquisitions, legally linking the two organizations[2]

Make Sure to Discuss these Areas

If you decide seriously to entertain mergers and acquisitions, here are some areas to take into account:

• Mission.  This is the most important criterion when considering a merger.  It is also an easy place to get stuck, because nonprofits express their mission statements in different ways.  Some call it vision.  Some confuse it with values.  I often suggest that leaders ask themselves, “Why do we exist?,” and use that as the basis for mission comparison.
• Goals.  Are you clear about your organization’s short and long-term goals?  Will the merger assist you in achieving those goals?  Is the sister organization also clear about their objectives?  If not, find another partner!
• Leadership.  The easiest time to effect a merger is when the executive director of one of the organizations is retiring or moving on.  The issue of who will lead the combined organization is often one of the biggest sticking points in merger discussions.  Board members, of course, will be the ones ultimately to vote “yay” or “nay,” so be sure they are intimately involved.  In fact, they should be driving the process.
• Liabilities.  Although financial considerations often start the conversation, it is important to understand fully not just the current but the long-term liabilities of your potential partner.  Too much debt in a potential partner should be a red flag.
• Funders.  Have you just lost a key funder?  Have you acquired a large new one?  How will your funders react to the merger?  Can you bring them along with you?
• Volunteers.  These dedicated folks are often the ones most resistant to change in their beloved organization.  You may not be able to bring them all along with you, but do talk to them up front and try to involve them as much as possible in the process.

Shared service arrangements, mergers and acquisitions require some investment of capital up front, for lawyers, accountants, facilitators, etc.  This is where foundations and wealthy individuals can play a significant role.  If you have identified a potential partner or partners and are serious about pursuing close collaboration, please approach your funders and tell them about it.  There is no time to lose, and you may be surprised by how pleased the funder is.

If you would like advice about mergers, acquisitions or any other strategy options, please reach out to me for a free consultation at vivien@avivastrat.com.

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[1] Alex Neuhoff, Katie Smith Milway, Reilly Kiernan, and Josh Grehan: Making Sense of Nonprofit Collaborations, (Boston, Bridgespan and Lodestar Foundation, 2014, pp. 14-16).

[2] Ibid, p. 2