Nonprofit-Owned Franchises: A Strategic Business Approach

[Pages:40]Nonprofit-Owned Franchises: A Strategic Business Approach

Prepared by: Community Wealth Ventures, Inc.

& IFA Educational Foundation

March 2004

Updated ? August 2004

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Nonprofit Owned-Franchises: A Strategic Business Approach

Table of Contents

Page

1.0 Introduction..............................................................................................3

2.0 Overall Findings........................................................................................5

3.0 The Nonprofit Business Case......................................................................6 3.1 The Need for New Sources of Revenue 3.2 The Emergence of Social Enterprise 3.3 The Challenge of Social Enterprise 3.4 The Franchisor Value to Nonprofits

4.0 The Franchisor Business Case...................................................................10 4.1 The Stages of Franchising 4.2 The Challenges of Working with Individual Franchisees 4.3 Nonprofit Value to Franchisors

5.0 Lessons Learned from Existing Nonprofit-Owned Franchises........................14 5.1 Lessons from Nonprofit Practitioners 5.2 Lessons from Franchisor Practitioners

6.0 Recommendations for Expanding Nonprofit-Owned Franchisees...................25 6.1 Recommendations for Nonprofits 6.2 Recommendations for Franchisors

Appendices

A.

List of Nonprofits, Franchisors, and Franchise Experts Contacted.................30

B.

Overview of Existing Nonprofit-Owned Franchises.......................................31

C.

Case Example of a Successful Nonprofit-Owned Franchise:..........................35

Platte River Industries

D.

Case Example of a Franchisor with Successful Nonprofit Franchises:............37

Ben & Jerry's

E.

Target Criteria for Expanding Nonprofit-Owned Franchises...........................39

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Nonprofit Owned-Franchises: A Strategic Business Approach

1.0 Introduction

In a period where resources for social needs are becoming scarcer, nonprofit organizations are exploring new avenues to generate the resources necessary to sustain and grow their organizations. One of these options is social enterprise ? the use of profitable business ventures as a means to generate unrestricted income.

In many cases, the challenge of creating a successful business from the ground up is larger than many nonprofits are prepared to undertake. Business success largely depends on identifying a viable opportunity, creating a profitable business model, and consistently mastering operational systems and processes. Nonprofit organizations often struggle to identify and exploit such opportunities for financial gain. Although nonprofits may have a clear understanding of the needs in a given community and be able to raise the necessary capital to start a business, they are frequently unable to address the service delivery, marketing, and accountability challenges that all small businesses face.

Franchising can represent an effective approach to mastering the complexities of a small business. Franchise products and services frequently have been painstakingly developed and improved by the franchisor, and in most cases, they have succeeded in the marketplace. In addition, these businesses usually have developed an operating system that is clearly defined, carefully researched, and universally applicable. More importantly, franchisors often provide training and management assistance to their franchisees to help address common business problems that all small businesses encounter. As a result, franchising offers entrepreneurs tools that increase their likelihood of success.

For these reasons, franchising merits closer consideration for the nonprofit sector. It not only promises to help address the question of how to provide innovative nonprofits with the structure and support necessary to convert their interest in social enterprise into profitable businesses, but it also provides a roadmap for implementing these ventures. By offering established products, structures, and support systems, franchising allows nonprofits to focus their resources on managing a business rather than creating one from the ground up.

Similarly, the nonprofit sector represents an intriguing opportunity for franchise companies looking for qualified franchisees to expand their systems. Charitable organizations are an untapped market that can offer unique benefits to an innovative franchisor. With over 1.2 million nonprofit organizations1 in the United States, the potential pool for franchisee candidates within this sector remains quite large.

Unfortunately, little is known about nonprofit-owned franchises. While the Ben & Jerry's PartnerShop Program has received significant media attention, there are few resources available on how to expand such a practice. As a result, Community Wealth Ventures (CWV) and the IFA Educational Foundation (IFAEF) have partnered to conduct an in-depth study into nonprofitowned franchises to explore the use of franchising as a tool for both the nonprofit and franchising sectors. The goal of this project is to answer three principle questions:

1) What value do nonprofits and franchisors represent to each other? 2) What are the lessons learned and challenges faced by existing nonprofit-owned

franchises? 3) Is there a strategic business case for expanding nonprofit-owned franchises?

To find answers to these questions, CWV and the IFAEF spoke with the executive directors (or their representatives) of 18 nonprofit organizations that currently operate franchise businesses and the CEOs (or their representatives) at 11 franchise companies with existing nonprofit

1 Independent Sector. The New Nonprofit Almanac and Desk Reference. 2002

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Nonprofit Owned-Franchises: A Strategic Business Approach

franchisees. Identifying these organizations was challenging, both because the practice is not particularly widespread, and because few industry and nonprofit leaders are aware of the existence of nonprofit franchises. Nevertheless, these interviews form the basis for this report. While the sample is relatively small, we believe it represents a significant portion of the nonprofits and franchisors that have entered into such partnerships. It is essential to note that the purpose of this project is to develop viable business relationships for both the nonprofit and franchising sector. Franchise companies will not be interested in working with nonprofit organizations if they cannot demonstrate an ability to operate them successfully. Similarly, nonprofits will not be able to generate net revenues or provide job-training opportunities if they cannot operate their business to the franchisor's standards. This report seeks to understand the value proposition that each represents to the other, and by doing so, help to accelerate the practice.

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Nonprofit Owned-Franchises: A Strategic Business Approach

2.0 Overall Findings

Based on the research conducted, CWV and the IFAEF have reached the following four conclusions regarding nonprofit-owned franchises:

1. The nonprofit sector represents a viable market for franchisors to expand their systems.

Nonprofit organizations ? as established, functioning entities ? have assets that individuals often do not possess. These assets can be leveraged throughout the franchising process to create tangible value for franchisors that can drive both unit and system-wide success. This value includes:

Higher brand awareness; Increased system-wide sales; Stronger community relationships; and Differentiated market presence.

2. Franchising mitigates many of the risks incurred by a nonprofit looking to start a small business venture.

For nonprofits pursuing small business ventures as a means to diversify revenue sources and increase organizational sustainability, franchising can increase the likelihood of success by providing nonprofits with:

An established business concept; An established brand; Well-defined operating systems and cost structures; and On-going training and operations support.

3. Franchisors can do more to maximize the value received from their nonprofit-owned franchise units.

Most of the franchisors interviewed treat their nonprofit-owned units as regular franchisee units and do not incorporate their nonprofit partnerships into their marketing activities or their community outreach efforts. As a result, these companies often do not realize the full marketing/public relations benefits that such partnerships offer.

4. Expansion of nonprofit-owned franchises would benefit from specific assistance for franchisors and nonprofits interested in this practice.

While nonprofit-owned franchises represent a unique opportunity for both sectors to achieve their strategic objectives, few franchisors or nonprofits have engaged in such partnerships. To spur the expansion of nonprofit-owned franchises, nonprofits and franchisors should support the development of technical assistance resources in the following areas:

Applicant identification ? To help franchisors identify and screen qualified nonprofit applicants for their franchise systems and to increase the number of nonprofit applicants.

Business planning ? To provide nonprofits with targeted assistance in developing comprehensive business plans for their proposed franchise units.

Site selection ? To encourage nonprofits to select and develop a suitable location for their franchise unit based on business opportunity rather than current holdings or mission objectives.

Access to capital ? To help nonprofits identify and secure financial resources during the capitalization stages of their franchise unit.

Management screening/recruiting ? To facilitate the process of recruiting and hiring skilled management personnel.

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Nonprofit Owned-Franchises: A Strategic Business Approach

3.0 The Nonprofit Business Case

Key Points

1. Nonprofits are beginning to pursue small business ventures to diversity revenue sources and increase organizational sustainability.

2. Franchising mitigates many of the risks incurred by a nonprofit looking to start a small business venture.

3.1 The Need for New Sources of Revenues

As nonprofit organizations prepare to meet the challenges of a new century, many are finding that the need for their services has increased significantly. With a widening economic gap and reduction in government spending, organizations are realizing that the safety net that they provide is becoming strained. At the same time, nonprofits have seen a steady decline in the amount of philanthropic funding available for programmatic support over the past few years. After the terrorist attacks of September 11, 2001, many nonprofits saw philanthropic dollars diverted to more visible efforts centered on the victims of terrorism. In the economic downturn that followed, corporate support and corporate sponsorships also diminished. The asset base of many large and established grant-making institutions shrank dramatically. As a result, nonprofits now have to do more with fewer available resources.

3.2 The Emergence of Social Enterprise

In response to this growing pressure, innovative nonprofits are looking to the small business sector for solutions ? analyzing, learning from, and even co-opting business practices and ideas in order to launch market-based ventures. Community-based nonprofits ranging from childcare providers and homeless shelters to charter school and youth development organizations are increasingly supplementing charitable donations with earned revenues. Having developed products and services that transform lives and communities, many nonprofits are beginning to realize that they must create more of their own wealth that will enable them to reach more individuals in need. Commonly referred to as "social enterprises", these ventures hold the promise of generating revenues to improve organizational sustainability and, in many cases, to further mission objectives.

Figure 1. The Emergence of Social Enterprise

A s n ew exte rn al p re ss u res affect th e n o n p ro fit se cto r, o rg a n iza tio n s are in cre a sin g ly tu rn in g to so c ial en te rp rise fo r in n o v a tive so lu tio n s.

D e crea sin g P h ilan th ro p ic

F u n d in g

? R e d u ce d gov e rn m en t fu n d in g ? S h rin k in g fo u n d a tio n e n do w m e n ts ? Th e sto ck m a rke t `b u b b le ' b u rs t ? S tru g g lin g e c o n o m y

N o n p ro fit S ecto r

S o cia l E n terp rise C re a tio n

? N e w s o u rc e o f fu n d in g ? U n re s tric te d re v e n u e s ? C o n tro lle d b y o rg a n iz a tio n ? N e w m is s io n p la tfo rm

In crea sin g S o cial Need

? W id e n in g e co n o m ic g a p ? R is in g u n e m p lo y m e n t ? In c re a s in g p o v e rty ? W e lfa re -to -w o rk re fo rm ? 9 /1 1

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Nonprofit Owned-Franchises: A Strategic Business Approach

This concept covers a wide range of activities including product manufacturing, retail sales, consumer-driven services and market-based partnerships with for-profit corporations. As such, a social enterprise is more akin to a for-profit business than a nonprofit program. In fact, depending on its legal structure and tax status, a social enterprise can remain a part of the nonprofit's corporate structure or be structured as a for-profit subsidiary of the nonprofit organization.

While a handful of organizations have historically engaged in social enterprise ? ranging from Girl Scout cookie sales to Goodwill thrift stores ? scores of nonprofits nationwide are beginning to explore this approach as traditional funding sources continue to diminish. For example, the Nation's Capital Child and Family Development (NCCFD) ? the largest childcare provider in the District of Columbia ? utilized the excess capacity in its kitchen facilities to create an institutional catering venture. Today, the business provides meals on a contract basis to several charter schools and unaffiliated childcare organizations located within the Capital region in addition to the 500,000+ meals it serves to its own daycare centers. Similarly, the COMPASS School in Boston leveraged its institutional knowledge to start a consulting business that trains school districts on the most effective way to teach self-discipline and life skills to troubled youth. The venture now generates over $900,000 in annual revenues for the organization. Examples such as these increasingly are becoming more prevalent within the nonprofit sector as organizations begin to respond to the changing environment.

3.3. The Challenge of Social Enterprise

Unfortunately, the path to developing a successful social enterprise remains challenging for many organizations. Not only are the cultures of many nonprofits not adapted to creating business ventures, but organizations must also contend with the challenges that face every small business start-up. These challenges can greatly increase the risk of failure for a new social venture, and addressing them often requires significant resources. According to a recent National Federation of Independent Business (NFIB) study, over 30% of new business fail after four years.2

Figure 2. The Challenge of Social Enterprise

Nonprofits must overcome significant challenges in establishing a successful social enterprise.

Unproven Business Concept

? Does it meet a market need? ? Will customers be willing to pay?

e

Existing Competition

e

? Established market presence & brand awareness

? Existing customer base

e

Social Enterprise

Difficult to Acquire Financing

? Nonprofit status ? High perceived risk of failure

Unproven Business Model

? Untested internal operations ? Inexperienced service/product delivery ? Significant learning curve

2 "Study Shows Start-ups Have High Rate of Success." Feb. 19, 2003. .

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Nonprofit Owned-Franchises: A Strategic Business Approach

As a result, while social enterprise represents a promising option for nonprofits, organizations pursuing this route will need to address the following challenges:

Unproven business concept ? At the time of its conception, any business idea can seem very promising. However, there is no guarantee that the idea will attract a sufficient customer base to be profitable or that it even addresses an actual market need.

Unproven business model ? Even with a solid concept, a start-up must still build the business. This task is fraught with challenges, as systems must be developed to deliver the product/service, to attract and retain customers, and to minimize expenses while maximizing revenues. Any miscalculations or inefficiencies during this phase can greatly damage the venture's financial viability and/or reputation, which can ultimately cause it to fail.

Difficulty acquiring financing ? Given the uncertainty of its business concept and model, a small business often has difficulty securing the resources needed to properly capitalize the venture. As a result, small businesses often must finance themselves either through personal loans from the entrepreneur or through higher-interest loans from traditional financial institutions. This situation often negatively affects a start-up's ability to properly capitalize the venture and its initial cash flow.

Existing competition ? Even if a small business manages to secure the capital to launch, the venture must then compete with other established businesses for customers and sales. Start-ups are inherently at a disadvantage during this process due to the lack of customer awareness and the absence of existing relationships in the market.

3.4 Franchisor Value to Nonprofits

Hence, while social enterprise represents a promising option for the nonprofit sector, it remains a risky proposition for many organizations. However, franchising mitigates many of the risks incurred by a nonprofit looking to start a small business venture.

Figure 3. Franchisor Value to Nonprofits

Social Enterprise

Proven business concept

Established brand

? Market-tested product/service

? Secures buy-in among stakeholders

? Allows nonprofit to compete immediately

? Attracts customers immediately

? Lends credibility to social enterprise

Defined operations

? Delivers proven processes

? Allows focus on execution

? Provides guideline for all operational issues

Well-defined cost structure

? Allows for more accurate financial projections

? Helps nonprofit secure necessary startup capital

Operations support

? Start-up training

? National/regional advertising

? Continual management support

? Bulk purchasing access

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