A New Model of Social Enterprise: Master Franchising

old jg fundraising, Philanthropy, Prison Leave a Comment

IMG_1745-0.JPGAt the Prison Entrepreneurship Program, we just announced one of the most significant milestones in our organization’s recent history … the acquisition of a master franchise for the entire state of Texas by our for-profit subsidiary, the Communitas Auto Group.

(Read more here)

Over the next twenty years, we will develop around 20-30 automotive repair shops under the brand of The Auto-Lab Complete Car Care Centers. These shops will provide hundreds of living wage jobs (many of which will be for graduates of PEP); by 2023, we anticipate they will also grow to provide around $1 million per year in revenue to support PEP’s mission.

Those facts alone are worth celebrating. But there are two aspects of this initiative that get me even more excited… because they are far larger than just PEP.

First, this effort represents a seismic shift in the franchising world. There are fewer than 100 franchise stores that are owned by nonprofits; most are in the food services arena, like Ben & Jerry’s, Nathan’s Famous, Annie’s Pretzels, etc. And in the majority of cases, nonprofits only own a single store.

Through our subsidiary, PEP owns the rights to the entire state of Texas for The Auto-Lab. Within a few years, we will likely own more franchise stores than any other nonprofit in the country.

This will be a game-changer for nonprofits, because we will prove the value that nonprofits can bring to the franchising community as BUSINESS PARTNERS. After all, here are some of the assets that PEP brought to the table that most typical franchisees lack:

  • A robust governing board and advisory board structure that includes 50+ experienced business leaders whose expertise we can tap to guide the venture’s growth;
  • Immediate access to a qualified and motivated workforce of strong potential employees and store managers (i.e. our graduates);
  • Thousands of active relationships with potential customers in multiple cities across Texas (i.e. our volunteers and donors, not to mention our graduates and their families).

The latter is particularly valuable for franchisors. Once we open a store in Houston or Dallas, we will have thousands of people in those markets who already know about PEP and who would be willing to give our store a try. And for a new entrant to the market, that is an invaluable asset to tap.

Further, within each of those three groups above, we have not only potential customers and employees … but potential investors. And more importantly — potential franchisees.

Yes, this venture will provide jobs for our graduates and revenue for PEP.
But the broader impact will be on how we can transform the way
that the franchising community looks at nonprofits.

Thankfully, the remarkable leaders at The Auto-Lab had the vision to see what we could offer. Yet throughout this process of securing a franchise, we encountered a high degree of skepticism from other franchisors about working with a nonprofit (let alone one that worked with felons!). The success of Communitas Auto Group will force other franchisors to take notice … and, we hope, become much more open — indeed, eager! — to engage nonprofits as franchisees.

That is the first reason why I am excited.

But the second makes me even more so.

To fund this initiative, we pioneered a new financial model that we believe could serve as a template for how to finance social enterprises and earned income initiatives owned by nonprofits. Thanks to the guidance of our board and some very wise counsel from one of the preeminent Houston corporate law firms, we have built a model that allows the Communitas Auto Group (“CAG”) to harness the power of private equity while maintaining PEP’s long-term ownership of the venture.

In brief, CAG is incorporated as a for-profit company. As explained in the link at the top, CAG was capitalized with an initial investment from Mike Humphrey of Houston, Texas. Mike is now the majority owner of the venture, but PEP was granted a sizable carried interest in CAG at essentially no cost. There is a mandatory distribution to PEP of $50,000 per year from CAG, and a scheduled buy-back of the equity from the initial investors through the profits generated by the business. This will allow PEP to fully own the company within approximately ten years, if CAG grows in line with our conservative financial models.

Once that occurs, we anticipate that CAG will be contributing approximately $1MM per year in unrestricted revenues back to PEP. That is the equivalent of building a $25-30MM endowment for the organization … only this is one that creates hundreds of jobs along the way for our graduates.

All without relying on philanthropy.

THAT is what is really sexy about all of this. We are blazing a new trail in how mission investors can complement their charitable giving with strategic investments that create both market returns AND social benefits.

And when we can do that … we exponentially multiply the amount of funding that we can access. After all, just look at the world of grant-making foundations. They distribute, on average, 5% of their assets in the form of grants. But the other 95% is held in investments.

By tapping into that 95% … we effectively multiply the base of support available by a factor of 19X.

That’s no different for major donors. However generous they are, the vast majority of major donors have more money in their investment budgets than in their charitable giving budget. By tapping into those far larger pools of capital, we dramatically expand the percentage of “wallet share” that can be tapped by the social sector.

And THAT is something that our team will be very proud to leave as part of our legacy.

Onward!

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