Imagine a world where a nonprofit buys a for-profit company. While nonprofit expansion through strategic acquisition isn’t unheard of in the health care and senior living industries, it almost never happens in other nonprofit fields.
As a featured conversation on the Successful Nonprofits Podcast, we recently spoke with Dave Shaffer, CEO of Atlanta-based First Step Staffing about their acquisition of a for profit staffing firm.
First Step Staffing was started visionary Greg Block who sought to provide employment opportunities to homeless Atlanta residents. His vision was pure genius in its simplicity: build a staffing agency that provides homeless people temp-to-perm jobs and uses the financial surplus to provide additional client services that support employment and income generation.
Founded in 2006, First Step Staffing was already a successful nonprofit by any standard measure. The organization had enjoyed steady growth until it approached a $2 million annual budget, and the budget hovered near this mark for almost half a decade. Each year, hundreds of homeless men and women used First Step Staffing to obtain income, and this income enabled many to obtain housing. But growing beyond the $2 million mark was necessary to impact the lives of even more homeless Atlantans.
It became clear to the organization that expanding its impact required dramatic growth. They could have invested in a larger sales force to pursue additional employers, but this would have taken years to pay off and involved significantly more risk. Instead, they decided to buy a for-profit staffing company because such a purchase would immediately acquire new employer relationships, obtain the infrastructure necessary to support a larger organization, and offer employment to practically any homeless person in Atlanta who was ready to work.
The organization eventually purchased Atlanta’s fifth largest staffing firm, enabling it to grow from a $2 million organization to a $22 million organization. This dramatic expansion also achieved the vision of providing employment to any homeless Atlantan ready and able to work.
Of course, First Step Staffing conducted due diligence on the prospective purchase and ultimately the deal was brokered with a mix of philanthropic dollars, loans, and seller financing. One year after the acquisition, CEO Dave Shaffer reports that their financial projections are better than anticipated, and they don’t anticipate any issues in paying the loans.
After my conversation with First Step Staffing, I wondered if other nonprofits have purchased a for profit company, but couldn’t find many examples. In fact, a google search for “nonprofit buying a for profit company” identified only this Nonprofit Quarterly Article about senior living facilities, and articles about First Step Staffing in Forbes and the Atlanta Business Chronicle.
The fact that national and regional publications have picked up the First Step Staffing story clearly indicates this is an emerging opportunity for nonprofits to consider. Of course, nonprofits enjoy many competitive advantages when purchasing a for profit, including the ability to finance at least part of the purchase through major gifts and grants. This dramatically reduces the risk, while also providing immediate equity necessary for financing the remainder of the purchase.
Since this is not yet a common tool to support a nonprofit’s growth, I brainstormed a few possible purchases nonprofits might consider:
Earlier this week, the White House released “budget blueprint” for the upcoming fiscal year. While not a formal budget, it offered guidance on White House priorities that included eliminating 9 important federal agencies and many other funding sources (like CSBG and CDBG). I read the 62-page budget blueprint and wrote an extensive blog post yesterday, which you can read here.
With one party in control of the legislative and executive branches, a tsunami of change is inevitable and will impact nearly every nonprofit organization. Like all great storms, the change will come in strong waves: first regulations will get looser or tighten, then funding will rise or fall, and collateral damage on individual households and organizations will be felt throughout the sector.
While paradoxical, some organizations will benefit from the pending changes, others will be at a disadvantage, and the most adaptable organizations will emerge stronger and more resilient than before.
As a nonprofit consultant, podcaster, and supporter, I have been very surprised by the number of nonprofit organizations continuing with “business as usual”.
To continue the storm analogy, it feels like organizations have been warned a major storm is coming, but they are not filling sandbags, recruiting people to help, and identifying ways to stormproof their organizations. With their grant contracts secure for another 12 – 24 months, they aren’t currently preparing for possible government funding cuts of 25% - 100%.
This lack of action is understandable because so many organizations aren’t even sure where to start, but most organizations still have time to act. For this reason, I’ve outlined five steps your organization can take now to position your organization for changing times:
#1: Invest in Fundraising!
The two most important factors in fundraising success are developing a plan and having the appropriate staff. For this reason, allocate the funds necessary to evaluate your fundraising efforts, create (or revise) your fundraising plan, and hire the right staff to implement this plan.
Some organizations, such as Planned Parenthood and the American Civil Liberties Union, have even used the current rhetoric as a rallying cry to raise more funds. The daily news coverage of dramatic policy changes gives them a new reason to solicit donors every morning!
Remember: the ability to raise more funds from individuals will always serve your mission well.
#2: Get Media Ready!
Regardless of your mission, reporters will want to speak with those impacted by policy decisions. Prepare your organization by identifying spokespeople, crafting talking points, preparing clients to speak with reporters, and letting reporters know you can offer real people impacted by policy who are also ready to be interviewed.
When pitching ideas to the media, remember that your organization’s story is best told through people you serve. For example, people are more likely to learn about 300 low-income clients losing health insurance if one brave patient is willing to tell her story to the local news.
#3: Prepare to Advocate!
Empower your board members, volunteers, donors and clients to advocate for policies that promote and support your mission. Specifically, ask them to call legislators when relevant legislation is being considered and make sure they know how to submit public comment to local, state, and Federal agencies that are legally required to consider citizen input before changing policy.
#4: Join an Association!
In addition to joining your state or local nonprofit resource center, actively participate in an association for organizations with similar missions and services. You should expect your mission-based association will alert you of pending legislation, policy changes, and court decisions that will impact all organizations providing similar services.
Joining an association will benefit your organization in many other areas. In fact, an effective association will provide your organization with technical assistance, leadership development, program development, and fundraising support specific to your mission and the services you provide.
#5: Revisit your strategic plan!
When the environment changes, it is always a good idea to review and revise your plan. If your organization’s funding may get cut by 15% or the demand for your service may increase by 10%, it is better to plan for the possibility before it becomes a reality.
If your organization’s environment changes dramatically, however, you may need to begin a new strategic planning process. This is especially true if your organization is in the high-risk red zone on the Trump Risk Matrix below:
Yesterday the White House released Donald Trump’s “budget blueprint” that outlines his spending priorities and cuts for the upcoming fiscal year. Knowing that this budget blueprint would have broad implications for nonprofits across the nation, I sat down this morning to read the 62 page document and summarize changes that nonprofits should anticipate.
In order to disseminate this information quickly, this report includes screen captures of the actual document and has not been carefully proofed for pesky “type ohs” (sic).
In his letter transmitting the budget blueprint to congress, Donald Trump noted, “. . . .I submit to the Congress this Budget Blueprint to reprioritize Federal spending so that it advances the safety and security of the American people.” After reading the document, I can attest that his budget blueprint does indeed increase funding for national defense, border control, and law enforcement. But it jeopardizes the security of many of our poorest citizens – their food security, housing security, and neighborhood security.
While this report primarily focuses on the impact the budget blueprint will have on nonprofit organizations, the greatest impact will be on low-income Americans of all ages, ethnicities, and geographies. They will feel the impact the most because they will be affected by declining nonprofit services and declining government sector services.
It is also important to note that the President has essentially issued a policy paper. There is still time for nonprofits, their associations, and their clients to advocate and change the actual budget.
With these caveats, let’s walk through the budget.
Funding Sources Proposed for Elimination
Funding Sources Proposed for a Significant Decrease
Funding Sources Proposed for an Increase
Funding Sources to Continue But No Clarity On Funding Levels
Elimination of Agencies
The budget blueprint calls for the elimination of agencies that form our country’s social safety net. These are the agencies that ensure justice for everyone, promote economic mobility, ensure equal access to the arts, and often give people their first job out of college or their last job before retirement. Under this budget blueprint, funding for the following independent agencies will be completely eliminated:
Appalachian Regional Commission:
$0 in FY 2018. ARC was founded in 1965 to close the close the profound socioeconomic gaps between Appalachia and the rest of the nation. ARC serves 420 predominantly rural counties with a combined population of over 25 million rural Americans. The Commission operates programs and provides grants that make the Appalachian region more competitive in education, entrepreneurialism, infrastructure, and tourism. In recent years, it has devoted significant resources to helping the region’s economy transition away from being coal-dependent. Verdict: Rural Appalachia will lose support for economic development.
The Corporation for National and Community Service:
$0 in FY 2018. This national agency engages over 5 million Americans in service every year, including 75,000 AmeriCorps members and 270,000 Senior Corps. CNCS also operates the Social Innovation Fund, Volunteer Generation Fund, Days of Service campaigns. These important volunteer programs, which include grants to many nonprofits, will be eliminated. Verdict: Fewer volunteers for nonprofits, fewer organizations with the infrastructure to support volunteers.
The Corporation for Public Broadcasting:
$0 in FY 2018. CPB strives to support diverse programs and services that inform, educate, enlighten and enrich the public. Through grants, CPB encourages the development of content that addresses the needs of underserved audiences, especially children and minorities. CPB also funds multiple digital platforms used by thousands of public media producers and production companies throughout the country. CPB issued 575 large grants to support 1,498 public radio and TV stations. 70% of the organization’s budget goes directly to local public TV and radio stations, 248 of which are rural. Verdict: Public broadcasting will likely survive in areas with higher population density (cities and suburbs), but rural areas will lose this important resource for local programming and news.
Institute of Museum and Library Services:
$0 in FY 2018. This Federal agency supports the growth and development of museums of all sizes. Of note, it provides capacity building grants to small and medium-size cultural institutions in urban, suburban, and rural areas. Verdict: Struggling cultural organizations across the country will have more barriers to becoming a sustainable institution. Many will close.
Legal Services Corporation:
$0 in FY 2018. Provide financial support for civil legal aid to low-income Americans. LSC promotes equal access to justice by providing funding to 134 independent non-profit legal aid programs in every state, the District of Columbia, and U.S. Territories. LSC grantees serve thousands of low-income individuals, children, families, seniors, and veterans in 813 offices in every congressional district. Verdict: Fewer low-income Americans will have access to legal representation when they need it most.
National Endowment for the Arts:
$0 in FY 2018. The NEA funds, promotes, and strengthens the creative capacity of our communities by providing all Americans with diverse opportunities for arts participation. In FY 2015, the NEA awarded more than 2,300 grants in every Congressional district in the country, roughly half intended to reach underserved populations. Through its direct grant making, the NEA will support more than 30,000 concerts, readings, and performances and more than 5,000 exhibitions of visual and media arts with annual, live attendance of 33 million. NEA-supported broadcast performances on television, radio, and cable will have additional audiences of at least 360 million. Verdict: Organizations often use grant-matching requirements to encourage local giving of the arts. There will be fewer performances and exhibits and less local support for the Arts.
National Endowment for the Humanities:
The NEH supports scholarly and cultural activity in order to achieve a better understanding of the past, a better analysis of the present, and a better view of the future. NEH grants typically go to cultural institutions, such as museums, archives, libraries, colleges, universities, public television, and radio stations, and to individual scholars. Verdict: Less funding for the humanities.
Neighborhood Reinvestment Corporation:
The NRC seeks to promote reinvestment in urban, suburban and rural communities by local financial institutions working cooperatively with residents and local government. It funds 235 community based organizations that build resilient, sustainable, and engaged neighborhoods. Verdict: Neighborhoods suffering from blight and economic disparities will not experience growth.
United States Interagency Council on Homelessness:
This federal agency coordinates and catalyzes the federal response to homelessness among the 19 Federal agencies tasked with addressing the issue, as well as governors, mayors, and continuum of care leaders. Verdict: With less coordination of homeless intervention efforts, many communities will experience duplication of services.
And The Cuts Keep Coming
While the President proposes the wholesale elimination of many agencies, his budget priorities will impact funding and services in several key areas:
Food Security and Housing
The budget proposes eliminating the discretionary programs within the Department of Health and Human Services’ Office of Community Services. This includes the
Affordable Housing will be harder to build and harder to obtain.
In eliminating both the Community Development Block Grant and the HOME Investment Program, there will be fewer resources to build affordable housing and fewer resources to support those entering or in affordable housing.
Of course, the Community Development Block Grant does more than just help homeless people. It also provides vital services like meals on wheels for home bound seniors, supports community centers providing after school activities, and much more. In a recent year, the CDBG touched the lives of over 73,000 Americans with housing, 17,000 with economic development, and 38 million with facility improvements in their communities
Finally, nonprofit builders of affordable housing will have fewer resources for capacity building with the elimination of Section 4 Capacity Building for Community Development and Affordable Housing. Consequently, they will also have a lower capacity for actually building housing.
Workforce and Economic Development
Workforce and Economic Development efforts will be taking hits as well. This includes less support for minority businesses and small- to medium-size manufacturers (the text from the budget blueprint is inserted below):
Nonprofits that provide workforce development and job training will experience significantly more demand for their services, as the government eliminates or decreases its job training programs.
With the elimination of the Senior Community Service Employment Program, older workers over age 55 will have fewer opportunities to reenter the workforce. Of note, this program funds 19 national nonprofit organizations that place older workers with employers for a risk-free trial period. During this time, the program funds 100% of the worker’s salary and subsidizes the salary for several months if the employer chooses to hire the older worker. Typically about a third of program participants are hired after the trial period, and many nonprofits have also used this program to recruit and hire older workers.
In an interesting twist of logic, the White House also recommends, “improving Job Corps” by closing under-performing Job Corps centers. It is not recommending replacing those centers that are closed, which means that many low income people will now lose access to their nearest Job Corps training center:
Finally, as seen throughout the budget blueprint, the President seeks to stop funding Federal programs with the expectation that states, municipalities, and employers will find the funds necessary to provide these programs for low-income job training and workforce development.
Also impacting nonprofit healthcare providers, they should anticipate more aggressive monitoring of Medicare and Medicaid reimbursements:
Healthcare and Disease Prevention
The budget blueprint also calls for 20% less funding for NIH, with a significant but undisclosed impact on research grants that will be “rebalanced”.
Ryan White funded healthcare for people living with HIV/AIDS appears safe, but it also depends on the definition of “supports”. Most of the narrative in the blue print is clear whether funds will be increasing, decreasing, or remaining the same, but it is not clear when referring to Ryan White. For this reason, “supports” leaves me suspicious.
Also nonprofit healthcare providers should anticipate more aggressive monitoring of Medicare and Medicaid reimbursements, as the blueprint seeks a $70 million increase in efforts to investigate healthcare fraud and abuse through these programs.
Nonprofits engaged in educating our children and young adults will also have fewer resources to support their students. As outlined below, public schools will have fewer resources for providing remedial help to under-performing students, and nonprofit organizations serving youth will have additional demands to provide educational and social support to these students.
The Supporting Effective Instruction program will be eliminated. This $2.4 billion program supports ongoing State and local efforts to ensure that every child has access to effective teachers. Funds implement educator evaluation systems that provide meaningful feedback and support to teachers and school leaders, prepare educators to implement standards, and attract and retain the best teachers and leaders in high-need schools.
The budget blueprint also eliminates the $1.2 billion 21st Century Community Learning Centers program. This program supports the creation of community learning centers that provide academic enrichment opportunities during non-school hours for over 2.2 million children, particularly students who attend high-poverty and low-performing schools. As a result of this program, 36% of the students experienced an improvement in math grades, 36% experienced an improvement in English grades, and 50% of the students’ teachers reported an increase in homework completion.
In addition to eliminating the striving readers program, which provides additional help for students reading below grade level, the budget blueprint also eliminates or reduces more than 20 unnamed programs.
President Trump appears to be fulfilling his promise to take care of our nation’s veterans by increasing funding for veteran healthcare by $4.6 billion, though his commitment on veteran homelessness is not as concrete. The budget blueprint merely indicates "support". This seems vague enough to make us worry about possible cuts in grants to address homeless vets:
With decreased funding for legal service corporations, decreased support for services benefiting our nation’s poorest residents, and an increase in immigration enforcement, the White House is preparing for an increase in Federal arrests:
Legal Service Corporations will have more demand for service from those arrested, while having fewer resources to represent them. Additionally, many of those arrested will be their household’s primary earner, which will place additional burdens on nonprofit organizations serving the poor in their community.
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