Setting up a side business: it is not the “holy grail”

I strongly believe that non-profit organizations should strive to cultivate additional income streams, including earning revenue from social enterprise activities. This helps to fund operations, build reserves and manage risk. I have recently talked about this in “How to Become a Sustainable Non-Profit Organization” and elsewhere on my website.

Some non-profit organizations choose to earn revenue from a “side business” – an undertaking which is distinct from their core offering. This business venture may take several forms. For example, I’ve recently worked with organizations that have established coffee shops, car washes, shared workspaces, training facilities and corporate training services. My colleagues and I are frequently asked to help organizations to setup such businesses.

While I support the decision to set up a side business, I believe that organizations tend to make three mistakes in how they implement these ideas. The first mistake is to underestimate the complexity, time and costs to achieve this. This is known as the “planning fallacy”. I encounter this fallacy everywhere I look, including in my own thinking.

The second mistake is for organizations to embark on such a venture before they have strengthened their operations and improved their thinking. I’ve worked with organizations that are clearly being undermined by internal weaknesses, but who are looking outside of themselves for the “holy grail” or side business that will help to solve their money problems with one “simple mission”.

The third mistake is to neglect opportunities to earn an income which are more readily available, such as building a product around their core offering, or providing existing customers with more value.

This article discusses this second and third mistake. It suggests that the establishment of a side business should be the result of a journey and not the first step. It encourages organizations to improve their functioning and attend to weak areas, before they start looking outside of themselves for solutions. It also reminds organizations to thoroughly investigate opportunities to earn an income that may be closer in reach.

The promise of a side business

I’ve seen how even the smallest business can provide a non-profit organization with the revenue needed to pay for important activities and build reserves. This is the promise that such endeavours represent.

For example, The Carpenters Shop is a non-profit organization in Cape Town that provides support to homeless people living in the city. A couple of years ago I was on its social enterprise steering committee, and I remember how its car wash business earned sufficient revenue to pay for its social worker and administrator.

However, the ability of such a business to contribute to income tends to be overestimated, as is the time and complexity involved in setting it up. The level of hope placed is such businesses tends to be proportionate to the level of helplessness experienced with the current situation.

The temptation to take immediate action

Nonprofit organizations are tempted to immediately setup a side business to provide new income streams.

The current fashion is to register a private company thereby creating a hybrid of legal forms. I’ve written how this may be the wrong step for many organizations – it is based on a poor understanding of the non-profit legal form and tax laws.

I strongly support decisive and swift action. However, when it comes to setting up new businesses, I believe that a more thorough process should be followed. This approach is more likely to create a robust and sustainable organization.

Working towards a side business

I believe that non-profit organizations that wish to establish a side business should evolve towards this event through a process of strengthening themselves and building upon peripheral income opportunities. Here are eight steps for how this can be achieved:

Step 1. Assess the current state. Conduct an honest appraisal of your current strategic situation and the internal weaknesses that your organization is experiencing, perhaps even denying. Sometimes it’s better to get an external party to facilitate this process and challenge assumptions and blind-spots.

Step 2. Improve mindset, costing and efficiencies. Learn how to think like a social enterprise. Examine where operations could be improved and made more efficient. Learn how to apply better costing models that can create a surplus. I’ve noticed how organizations that have taken this step have been able to quickly improve their income.

Step 3. Deliver more value to existing customers (including donors). With a more capable and efficient organization, you should investigate how you can do more for your existing customers. Do they have any other needs that you could help them meet? Go beyond what was contracted or promised. Impress them so much that they will stick with you and refer you to other potential customers, and possibly expand the scope of their contracts with you.

Step 4. Improve marketing and product development. Understand the power of branding your organization and marketing it effectively. Develop new products that meet the needs of your customer group and package them attractively.

Step 5. Expand offering to new customers. Once your existing customers (including donors) are very satisfied with your organization’s work, and you’ve improved marketing and product development, it’s time to pursue new customers. Start with those that are similar to the ones you have already, and in the same sub-sector. This enables your organization to work from a position of strength. Remember at this point, your organization is still earning income from its existing products, though these have been much improved and new customers have been brought on board.

Step 6. Pilot new products/businesses. With the basics properly in place, now it’s the right time to pilot new business ideas. I believe this is best done within your existing legal form. I recently did some work with Beautiful Gate in Philippi where we investigated the feasibility (i.e. can it work?) and viability (i.e. can it make sufficient money?) of seven business ideas before choosing the one to pursue. You rarely get it right on the first go.

Step 7. Create new business units. Once a business idea has been piloted successfully and proven both feasible and viable, it may be time to recruit some specialized staff or establish a steering committee with the required skills. This committee is typically chaired by a board member, but may consist of some external volunteers with sufficient skills to provide the oversight required.

Step 8. Register new organizations. Once the business unit is functioning effectively within the legal structure of your organization, it is time to consider whether to register a private company to house these operations. In my experience this is not always necessary and SARS’ rules around Public Benefit Organizations are more accommodating than most people think.

Its alright to stop at an early step to consolidate and reflect. It is most probably best to do this after step 5 (before you pilot new products/businesses) and after step 7 (before you register new organizations).

Conclusion

I strongly encourage non-profit organizations to develop additional income streams and consider how social enterprise thinking or business models can enhance their sustainability.

For some organizations, the decision to setup a side business is a good option. However, I believe that organizations should first conduct an honest appraisal of how they can strengthen their core capabilities and activities, and exploit income opportunities that build upon their core business and customer base. I caution against fixating onto an external business idea as the source of all hope – the “holy grail” that will solve all problems. This attitude can easily lead to more problems than solutions.

There are many things that organizations can do to improve income streams that don’t involve setting up new businesses. Let’s not forget that. Look inside before we look outside.

Thanks for Andy Simpson from Imani Development, and Philip Anastasiadis for useful feedback on this article.

Cultivating strategic clarity.

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