How to Start a Million-Dollar Social Enterpprise

For the last 10 years or so it seems like every other business leader I talk has an idea for a business that will funnel profits to a charity, while every charity leader I know wishes s/he had a for-profit venture that spun out loads of cash.

Examples of both abound. National Geographic Magazine is a benefit of membership in the not-for-profit National Geographic Society. But almost everything else—their catalog, their television shows, their travel tours—are for-profit business enterprises; enterprises on which National Geographic pays taxes.

A recent example of a company meant to funnel profits to nonprofit endeavors comes from my own hometown. Members of the billionaire Jon M. Huntsman family have acquired the high-end Sotheby’s real estate franchise in the luxury enclaves of Sun Valley, Idaho and Jackson Hole, Wyoming. (The splendid photo of the Grand Tetons comes from JT Palmer Photography).

Profits from the franchise will go to the Huntsman Cancer Center here in Salt Lake City, one of only a small handful of National Cancer Institute designated cancer centers between Texas and California. The family founded the Huntsman Cancer Center.

With the stroke of a pen, the Sotheby's franchise in Sun Valley and Jackson Hole has become a social enterprise.

The Huntsman family has been a generous donor to causes inside and outside of Utah, and not just with their money. The oldest son, Jon Jr. is the current U.S. Ambassador to China, and a former two-term governor of the state of Utah.

Kudos to the businesses that actually pull off the strategy of operating a for-profit venture to fund in whole or part a nonprofit entity. Certainly it doesn’t always play out that way.

I remember a small restaurant chain that was meant to fund a charity that taught teen leadership skills. The restaurant was terrifically-branded, but not well operated. The recipes just weren’t good enough.

Another for-profit venture I’m familiar with was a software firm that was founded to generate cash flow for an umbrella charity. The software company took years to get to profitability. Meanwhile the umbrella charity was left to develop its own funding mechanism just like any other charity.

Let me hasten to add that both these social enterprises were founded by experienced business people.

The fact is, new businesses have high failure rates and high margin businesses are hard to find. And you can be sure that if you demonstrate an ability to make a good profit in your niche, competitors will appear who won’t care about your cause component.

How did the Huntsmans mitigate those risks? Three ways:

1. They bought an existing franchise with a strong brand and a history of sales results. They bought their sales, in other words.
2. They left current management intact. The thinking probably went, ‘this group got the business to where it was attractive enough to buy, why insert uncertainty into the mix?’
3. This is the hardest one… they had the capacity to self-fund the purchase. They probably still borrowed the money, but unless the Sotheby franchise was hundreds of millions of dollars, the Huntsmans have the wherewithal to self-fund most purchases. Why is this important? Well, the cost of money is cheapest to those who already have money. There’s an element of truth to quip that ‘bankers only lend money to people who already have money.’

Wait a minute, you’re saying, this sounds like the old saw about the best way to make $1 million. The joke goes: “OK, first start with $1 million...”

And you’d be right. The best way to start a million-dollar social enterprise is with $1 million.