By Benjamin C. Litalien, CFE

Minority is an interestingly over-used term in many circles, so much so that it seems we could easily become insensitive to its breadth of meaning.  Can we afford to limit it to race, gender or sex?  Although each of those minority groups has vitally important issues, there is another opportunity to embrace diversity in franchising.  Think about the more than one million nonprofit organizations in America today, a mature and dynamic segment that interweaves the very social fabric of our continental quilt.  This sector ensures the least fortunate are clothed and fed, the history and art of our culture is preserved, that at-risk youth have mentors and job-training activities and that our freedoms such as religion, speech and bearing arms are protected.  

Increasingly, our dependence on nonprofits to provide societal basics is supplementing, and in some cases even supplanting, the role once held by government.  Yet, they are increasingly at risk of not meeting the financial requirements necessary to fulfill their missions.  The funneling of significant funding to key relief efforts such as 9-11, the tsunami, and Hurricane Katrina have diminished the resources once provided to thousands of service organizations.  And, with legislative and political changes affecting taxation, contracts and government funds, it’s a “one-two punch” on nonprofit bank accounts.  They are increasingly in need of proven businesses to generate unrestricted revenue, provide controlled environments for job training and mentoring programs and strategic alliances to raise awareness.

Where  Can These Essential Contributors Find Solutions?

The nonprofit sector has been traveling the familiar road of donors and grants for a long time, yet many fear that road is becoming narrow and overcrowded, which prompts many to consider a new journey to reinvigorate them and provide reliable resources for the mission ahead.  While the path of social enterprise offers the allure of new business development, earned-income and job-training platforms, it has left many travelers by the wayside with failed attempts, diminished resources and dashed hopes. 

At the same time, franchise companies face an efficient capital marketplace with new competitors emerging daily, giving franchise prospects more choices and opportunities than ever before, and making it more difficult for concepts to distinguish themselves among their competitors.  Also, many franchise companies are considering how they can effectively participate in socially responsible endeavors to support the communities they serve, but have struggled to find a disciplined approach beyond making donations, holding special events or the ever popular “change bucket” on the front counter. 

Franchisors Must Entertain New Prospects and Alliances

Now emerges the “Era of the Social Franchise,” where nonprofit organizations identify, acquire and operate proven and successful franchised businesses.  The intersection of the nonprofit and franchise worlds may well create a powerful and compelling gate to the future for both sectors.  It promises to provide renewed prospects for differentiation, develop sustainability and enhance the mission or goal for the conjoining parties.  While there have been some pioneers who have forged ahead over the past decade, there are less than 100 social franchises in the United States today, and the lessons learned from both the winners and the losers should be considered before joining the fray.

The journey down this path will continue to daunt those brave franchisors and nonprofits that venture forth.  Yet, as with any new path, it will continue to improve with each passing traveler, especially as they employ history as a guide and include some key advisors along the way. 

In a survey by Cynthia Massarsky and Samantha Beinhacker from the Yale School of Management—The Goldman Sachs Foundation Partnership on Nonprofit Ventures, they identify the need for support as critical.  They explain that, “Although some nonprofits have the potential to plan, create, and manage profitable business ventures, most of them cannot accomplish these tasks on their own.”  They also cite that the nonprofits which operate successful earned income ventures have annual budgets in excess of $12 million, retain more than 21 employees and are more than 11 years old.  If your concept of a typical nonprofit is the local church or shelter down the street, think again.  Many public charities are well heeled, mature operations with strong management teams and strategic leadership.  They have significant assets at their disposal and attractive relationships with major corporations and prominent advisors, not to mention substantial political and community clout.  Sounds like a formidable venture partner for any reputable franchisor.

Keys Franchisors Must Consider

Here are some of the answers from the collaborative report “Nonprofit Owned Franchises: A Strategic Approach,” conducted by Community Wealth Ventures, a Washington D.C.-based consulting firm, and the IFA Education Foundation:

Find the right partner

Just as franchisors do with their individual franchise prospects, it is essential that they stay true to their concept when considering a nonprofit organization.  Don’t be quick to sign-up the local homeless shelter for your ice cream franchise.  Campfire USA or the Boys & Girls Club would be a great choice for an education-based concept that provides structured mentoring to kids, which could be a natural extension in the neighborhoods that they serve.  And in many cases they may have facilities that could be suitable for housing the franchised business.  When there is a natural connection between the franchise concept and the nonprofit mission, you have a foundation for success; when you don’t, it’s a recipe for disaster. 

Don’t compromise the concept

What makes the franchise concept successful should stand true regardless of the owner of the franchise.  Therefore, don’t be quick to dilute your offering, curtail your hours and adjust your menu to accommodate the nonprofit.  Remember, they are coming to you because of your proven systems, established brand and economies of scale.  Even though there is need and justification for compromise in your contract, don’t let it spill over into your concept. 

Promote the relationship

Although there have been some success stories in the social franchise arena, they are not well-publicized by either the nonprofit or the franchise company.  One of the key ways to ensure that both parties are fully-accountable and engaged is to keep it in the public eye.  This can create a halo effect of good will for the franchisor and the nonprofit can raise awareness in the marketplace for their mission.  A strategic marketing and promotion plan should be created and deployed.

Track and monitor performance

Nonprofit franchisees will require a new and different level of support than your individual, entrepreneurial franchise owners.  The franchise will be dealing with a key contact and getting answers from a committee in many cases.  As a result, the franchise will need to keep close tabs on their operations to ensure that they are aligned with your system performance data, and that they understand what may be causing the gaps (i.e. food cost is increasing—what are the factors). 

The challenge of managing two bottom lines

Nonprofits realize that they must effectively manage two bottom lines when operating a social franchise; mission results and financial results.  This balancing act is vitally important given the inherent differences between an individual franchisee and the nonprofit, which operates by committee, can experience regular turnover in lead positions and can easily lose its focus on the franchise business.  As Judi Bishop, executive director of the Fort Worth YWCA which owns a Ben & Jerry’s Partnership ice cream franchise, found out: “The shop manager is the most critical component of a successful retail operation. He/she must be committed to the mission of the nonprofit and motivated to control cost of goods, provide good training and supervision for employees and constantly monitor and market sales.” 

As many franchisors know, having a passion for the business is essential.  For the nonprofit franchise manager, that passion begins with the mission of the nonprofit and must extend through the franchise business, a task not easily mastered.  And if a manager stumbles, the burden falls back on the nonprofit leadership team, which can lead to either a diluted focus on the franchise business, the nonprofit mission or in the worse case both.   If the franchise is allowed to languish financially for the sake of the social mission, it becomes a significant issue for franchisors and their inherent obligation to protect their brands for the good of the system.  Likewise, if the financial goals are sought after with such abandon that the effort loses mission connection, the question has to be asked why a nonprofit is competing with for-profit franchisees.

There are no easy answers to these and many other questions that must be continually considered and addressed.  Like their individual franchisee counterparts, nonprofits have much at stake and are assuming real risks which could include their ability to continue the good works that they are doing in communities across this country.   Franchisors and nonprofits will find the answers because it bodes so powerfully in the mix of strategies both are earnestly seeking.  For nonprofits, the sustainability necessary to ensure they can fulfill their purpose, and for franchisors, a disciplined approach to participating in social change with the added benefit of differentiation in the ever crowding marketplace. 

The well-documented success in the franchise sector will continue to compel nonprofits to brave this new journey, but it will take receptive and responsible franchisors to help create a bridge to the future.  For the sake of those in need of sustained support by the nonprofit fabric that warms our society, let’s hope for a well-worn path. 

Ben Litalien, CFE, is president and CEO of Social Franchise Ventures.  He can be reached at blitalien@socialfranchise.com .