Boards

To Close Or Not To Close, How Much Debt Is Too Much?

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A little over a week ago I received the news that one of our partner theatres decided to close its doors. That sent the rest of us scrambling to contact artists to see if we could salvage the tours with which the organization was involved.

The board has said they want to revise their business plan and perhaps reopen in 2013. In the meantime, come this Friday, the entire staff is out of a job. I am wondering if they will be able to resolve all their grants and settle other business in that time.

A conversation I had about their closing has had me thinking over the last week. When I read the news about their closing, I was somewhat relieved to learn the organization was $200,000 in debt. Given the debt amounts you usually see associated with failing arts organizations, this is relatively small. Though it is also more significant for their $1 million annual budget than for those with $10 million budgets.

Referencing this debt, a colleague asked if they couldn’t have simply gotten a line of credit from a bank to enable them to stay open. This got me thinking about how you determine when it is time to cease operations.

Given that they intend to revise their business plan and hope to restart operations, would it have been better to attempt a reorganization through the next season rather than lose momentum with their community and funders by closing?

Or given that their debt is about 20% of their operating budget, did they do the responsible thing by deciding to close in the face of what I assume to be dwindling attendance and fundraising prospects? Why saddle your new business plan with the burden of another year’s accumulated debt?

In the last couple weeks I read an article/blog post that criticizes a non profit board of a YMCA for being oblivious to the state of their failing organization. The article suggested the board should have seen the warning signs had they been paying attention to the financials.

Our partners were clearly paying attention and decided to do what they felt was the responsible course of action. There isn’t really any clear cut formula which dictates that you should close your business when your debt reaches a certain ratio of your budget because there are so many situational variables each organization faces. What one company can recover from may mark the start of a downward spiral for another.

I am curious to know at what point people think organizations need to close. Does seeing other non-profits rack up huge debts before closing or declaring bankruptcy inure us and make organizations more apt to keep operating under the assumption they haven’t reached that point of no return yet?

What’s The Expiration Date On That Arts Organization?

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A couple weeks ago Grant Makers in the Arts posted a piece by Rebecca Novick, Please Don’t Start A Theater Company. I had been thinking about the article for some time now when I saw a similar piece by David J. McGraw, The Epoch Model: An Arts Organization with an Expiration Date. Epoch Model… was published back in 2010 in 20UNDER40: Re-inventing the Arts and Arts Education for the 21st Century.

I was going to devote part of this entry discussing the similarities between the two, until I realized Rebecca Novick’s piece also was published in 20UNDER40 back in 2010 and is not appearing for the first time this year.

What McGraw suggests in Epoch Model.. is that arts organizations should form for a seven year life span and goes on to make some interesting arguments about the benefits of doing so.

It really isn’t a new one. I have recently been reading up about Lloyds of London which has technically reconstituted itself every single year since 1774. That may not be the most apt comparison to what McGraw suggests, but Lloyds originally insured sea voyages which many times were funded by groups that came together to invest solely in a voyage or trading venture and then dissolved thereafter.

Both Novick and McGraw provide examples of groups that realized their usefulness was over and willingly dissolved and suggest that people looking to form new arts organization integrate an expiration date or expiration conditions into the very formation of the organization.

McGraw suggests the following benefit to this approach:

•A single founding vision can guide the organization from start to predetermined finish.

•Productions, exhibitions, and initiatives can be selected to follow an artistic arc rather than merely filling generic programming slots year after year.

•The company can plan its organizational growth and contraction with an eye towards its end.

•Its membership can challenge itself to fulfill its mission with greater urgency, knowing that this collaboration is a fleeting opportunity with a defined commitment from each member.

•Audiences will know that they cannot take the organization for granted and that the organization represents a specific period of time, or epoch, of the artistic life of the community.

I was intrigued by the idea that the founding vision can be maintained because the founding board is more likely to stay committed knowing the project will only span seven years with a few additional years of commitment to tie up loose ends. (Recall that it is much better to stay on the board a sinking organization than to resign.)

I was also interested in his observation that:

“The Marketing Director has the most to gain from the Epoch Model. In addition to the novelty of creating brand awareness for such a unique company, every production will have a sense of urgency, as limited supply can increase demand. In fact, the organization may see cultural tourists from outside its region as news spreads of this relatively short collaboration of rising artists. Limited runs tend to draw more publicity and can pique the curiosity of even casual art-goers.”

He talks about the boon to real estate if the property owner in a bad market knows he can find a tenant who will occupy the property until things turn around, in the process possibly adding value to the neighborhood, as artists often do.

He also notes that an arts organization dissolving in their relative prime will actually contribute more to the community than an organization which has had to close because they were no longer financially viable. The former has a fair bit of property to pass on to various community entities, the property of the latter is generally liquidated for the sake of creditors.

Based on my reading of both articles idea of a transitory organization makes sense. We are discovering that the 501 (c) (3) model doesn’t really work for everyone. A temporary formation allows groups to essentially experiment with structures that work well for the participants and make sense for the particular community. It could be for a few months to accomplish a single project or it could be for a span of years. The board and the staff may be one in the same or they may be different entities.

I hate to invoke the image of viruses, but the short life cycles of the organizations could evolve a structure that is both effective and resistant to the travails of the social and economic forces of the time. Which of course means that continual evolution is required to meet the ever swifter shifts in social and economic forces.

There a few forces working against this sort of approach and they all involve money. As both authors note, the ever renewing arts organization idea is great when you are 20something, but once you want to settle down and get some stability, you aren’t going to want your arts organization to go gentle into the good night. Or you are going to start seeking work at conventional arts organizations. This might actually be a good thing. The infusion of people who have experimented with versatile approaches may keep the conventional organizations vital.

The other issue is that funders support a pretty narrow approach to the arts. There are certain characteristics they seek and performance measures they want to evaluate. If you have a history of success mounting a site specific dance piece in a warehouse and visual arts installation in a historic hotel but are looking to fund a theater piece in shipping containers on a barge, you may not meet any number of criteria related to being an established organization.

One thing that occurred to me as I was reading both pieces is that the people forming these organizations would have to invest the time to draw up agreements and keep good records of meetings discussion how resources will be allocated, etc. The benefit of existing corporate structures is that there are established laws which dictate the rights of board members, employees and customers.

It is easy to discount the importance of such arrangements when everyone knows the organization won’t endure. In the absence of a clear structure, people may not be paid what they are owed, conflicts may arise over ownership of assets and the board members may discover they are personally liable for the outcome of a lawsuit because no insulating structure exists.

In all, some interesting ideas are expressed in the articles, including the sobering concept emerging rather frequently that our organizations don’t necessarily have a right to continue to exist.

“But too many organizations confuse the need for art with the need for their particular company to exist. Despite emergency fundraising pleas, the death of an individual organization is not the death of an art form, nor will it deprive a community for very long.”

You Don’t Tell Me What To Give, Don’t Tell Me What To Say

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An interesting question was posed to Kelly Kleiman, the Nonprofiteer, about the practice of suggesting donors increase their giving from the previous year. The writer was offended at being told what to give the next year. Kleiman attributes the origins of the practice to universities who, anticipating the increased fortunes of their graduates as the moved along in their careers, asked for slightly greater amounts as the years progressed.

This seems like a great thing and, in fact, is the reason individual giving is such an important source of funds to organizations: while foundations often won’t continue their support unless you do something new and different for every grant, most individuals will just keep on giving unless you affirmatively offend them.

But what you’re saying is that the request for elevated support is just such an affirmative offense.

The problem is that the cost of everything continues to go up, and unless the monetary inflow goes up at the same time the agencies you support will find themselves seriously behind the 8-ball. Perhaps the agencies requesting your increased support would do better if they reminded you of that—”We haven’t been able to give our actors a raise for five years while their rents and grocery bills just keep on rising”—rather than beginning with a flat-out demand that you do more.

I thought the question and answer gave some interesting insight into the whole practice of “upselling” donors from year to year as well providing some guidance about how make the request a little more graciously.

What made me cringe was the second part of the writer’s question/complaint.

“And this year, when, as a board member, I was given the fundraising “ask” letters that were going out under my name to my personal contacts, I felt especially irritated to see the request for a specific additional amount. I would certainly never have written my friends directly with this request.”

Kleiman responds that the writer is within their rights to feel upset that such a request was going out under their name. It put me in mind of a piece from the Non-Profit Quarterly I wrote on this summer. The author, Simone Joyaux, referred to the practice of having board members solicit donations from family and friends ,as trespassing. She claims it leverages personal relationships rather than an interest in a cause and ends up alienating both the board member and their friends.

Joyaux noted that giving based on trespassing is generally shallow and not likely to persist after the board member has transitioned away from the organization. Unless, of course, the person solicited is genuinely interested in the organization’s cause. In which case it is better to have conversations and identify that interest initially rather than blindly solicit everyone in a board member’s address book.

This post title inspired by Lesley Gore

[youtube http://www.youtube.com/watch?v=zaw1ibwVbPI&w=640&h=360]

Info You Can Use: So You Think You Want To Merge

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It seems discussion of non-profit mergers is becoming more prevalent of late. I recently became aware of a research document created by Wilder Research and MAP for Non Profits looking at what factors contribute to or inhibit the successful merger of non profits in the pre-merger, merger and post-merger phases.

There were actually some parts of the document, What do we know about nonprofit mergers? Findings from a literature review, focus group, and key informant interviews, that were very familiar. So much so I thought perhaps I had already written a blog post on it already. It doesn’t seem that is the case. However, since their report includes a literature review in addition to surveying they conducted themselves, it is likely I read some of this before.

They raise some good questions and provide some interesting advice on many aspects of a merger on issues like the name of the new organization, getting a third party involved to shepherd the process, doing due diligence on each other, issues about conflicting organizational cultures, creating a clear time line for the process.

One suggestion they had was to involve your top five funders in the process in order to gain their investment. That may be very sound advice as at least one case they mentioned found that most funders treated the merged organization with its newly expanded capacity as if it were one of the constituent entities effectively cutting their support in half.

Many organizations chose to merge as a result of some sort of crisis, either the loss of leadership, financial problems, change in the operating environment, etc. According to the research, one of the worst times/reasons to merge is if one organization is at the brink of financial ruin. Other than the fact that the new organization will inherit the problems of the troubled organization and that it is not prudent to negotiate anything from a position of weakness, research shows that even mergers between relatively sound organizations don’t necessarily result in a financially stronger combined organization.

The following are areas that they identify as needing to be addressed during the merger phase. There is a similar list for the pre- and post- phases.

2A. Key stakeholder involvement
2A1. Executive staff champion
2A2. Board commitment to the merger process
2A3. Client, consumer, and funder involvement in planning

2B. Role of staff in merger process
2B1. Staff involvement in planning
2B2. Communications with staff throughout process
2B3. Staff’s perception of the effect of the merger

2C. Integrating formal and informal structures
2C1. Attention to cultural integration
2C2. Attention to board and mission integration

2D. Providing due diligence to the process
2D1. Clear decision making process
2D2. Clear and realistic time frame

They provided the following factors which contribute to a merger’s failure:

-Lack of capacity, sophistication, or skill in the board or executive leadership
-Leadership’s inability to communicate well or to effectively influence others
-A weak or declining balance sheet or imminent financial collapse of one organization
-Programs or services that are not particularly unique or of distinctive value to the community
-Organization’s fear of losing autonomy or change
-Differences in governance, culture, or mission
-Board and staff opposition to the idea of merger
Engagement purely for survival, not from strength
-People involved do not see the real work involved in a merger
-Loss of key leader during the process