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

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?

Stuff To Ponder: Do Foundation Boards Value Non-Profit Values?

There was an article on the Center for Effective Philanthropy’s (CEP) website in April that I felt started to give me some insight into why it seems that foundations and non profits often aren’t in synch with each other’s needs.

CEP President Phil Buchanan writes about research he and research analyst An-Li Herring did on the backgrounds of the CEOs of the top 100 Foundations. I was actually surprised to find that 60 of 100 came from outside foundations. Of those that came from foundations, only 21 were promoted internally from the foundation ranks. Seven had come from another foundation, four of them were already CEOs of those foundations, three of those four had come from outside philanthropy.

That seems like an exceptionally small number of people with philanthropy experience leading foundations.

The profile of the 60 CEOs from outside foundations broke down like this:

Twenty-seven had experience in the nonprofit sector broadly defined:

Those who ran operating nonprofits (not including institutions of higher education) number 14.

Those whose experience was in higher education, typically as a college president or dean, number 13.

Seventeen came directly from a role in business.

The remaining 16 CEOs who came from outside the world of organized philanthropy had positions in government, law, or other domains.

Since boards and CEOs set the tone and operational philosophy of the foundation, this can have a lot of influence on the manner in which they interact with non profits and the criteria they set for funding. After reading the article, I started to wonder if foundations have contributed to the pressure for non-profits to run themselves more like a business. I have never argued that operational discipline isn’t important for non profits, but they are quite different from for-profit entities.

Some observations Buchanan makes:

Second, foundation boards don’t much value experience at other foundations. Again, perhaps a focus on leadership development within philanthropy will change that, but moving from being a Vice President at Foundation A to CEO of Foundation B happens only very rarely (at least at the largest 100).

Third, experience as a grantee, if you exclude colleges and universities (which I’d argue are a different animal) isn’t much valued by most foundation boards when they’re searching for a CEO. It’s striking that there are more foundation CEOs who came to the position from a job in the corporate world than a job running a nonprofit (again, excluding colleges and universities).
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All that said, I’d still argue that boards might want to prize operating nonprofit experience more highly than they apparently do. Leaders who have experienced the pressure to meet payroll with no endowment to fall back on, and have felt what it’s like to be on the other side of the table from foundations, bring something important. They come to the role with a hard-earned understanding of the challenges of doing the on-the-ground work foundations fund – and of what nonprofits really need from their funders.

After reading these findings, I wondered what it is exactly foundations value in CEOs if it isn’t experience, empathy and knowledge about the sector the foundation serves. Buchanan also makes an “if it ain’t broke” argument in support of foundation boards looking to promote internally rather than introducing a potentially disruptive element.

Having read the piece I am really curious to know if external hires are generally more effective than internal hires or not.

It would also be interesting to learn if non-profits would give the highest marks to their relationships with organizations lead by CEOs with a long career in philanthropy. Likewise, it would be interesting to know if foundations would give the highest marks/most support to non-profits whose practices/values are similar to those of the CEO’s past industry.

Still More On Crowdfunding Start Up Arts Orgs

If you have been reading my blog regularly over the last few months, you know I have been keeping an eye on the possibility of the crowd funding elements of the recently passed JOBS Act replacing non profit status as a viable method of creating and sustaining an arts organization.

If you haven’t been reading that long, well harken back to my original musings on the subject as well as some more recent musings with links to information on the implications of the law as passed.

Hat tip to Charity Lawyer Blog’s Ellis Carter (whom I have previously incorrectly identified as male. Sorry about that Ellis) for her link to a piece on Startup Company Law Blog about the problems with the law.

Author Joe Wallin confirms many of the general suspicions I had about the costs of compliance probably being overly burdensome given the $1 million limit.

One thing that surprised me was that the law actually prohibits start ups from the “do it yourself” approach which I have always assumed to be a hallmark of start ups.

3) The Law Forces Companies To Use Intermediaries

The law forces startups to use intermediaries to raise the funds. This is fundamentally different from what typically happens with startups. Most startups raise funds without the help of intermediaries. In fact, this is the prevailing norm for startup companies. The typical advice to a startup is–don’t use an intermediary! Founders, do it yourself!

 But here the law forces companies into the arms of either registered broker-dealers or registered funding portals. These entities are subject to numerous requirements, and their compliance with those requirements will make the process much more difficult and costly for companies.

Maybe arts organizations with their bare bones mentality about providing a product might make it work within the restriction, but the whole point of pursuing an alternative to the non profit business model is to adopt an alternative approach and mindset about providing cultural experiences. (a.k.a. ramen isn’t a default food group for artists.) Though it will probably bring it own attendant problems, success might be measured by how diversely arts and cultural organizations manifest after phasing away from non-profit status.

At the end of his post, Wallin suggests Congress go back and make some changes to the law to allow start ups to proliferate more easily. I am sure there is still plenty of opportunity for successful crowd funded start ups within the law. If it isn’t changed before that, perhaps the successes will lend credence to the idea this can be a viable path for entrepreneurs, moreso with a few changes.

In Which I Have A Belated Realization

The lovely people at my state arts foundation sent me some information about National Endowment programs today that I thought I would share. The first is that there will be a webinar for the Challenge America FastTrack program on April 18. If you are thinking of applying and have questions, sign up!

The second thing I got was a PDF of the Our Town application guidelines webinar. I was interested to see that the program encompassed more than I originally assumed. The focus is on Creative Placemaking which means they are looking to improve quality of life, encourage creativity, support artists and engender a sense of community.

I had assumed they would support arts in public places, creation of arts districts and cultural facilities. I know some projects have included artist housing. I was pleased to learn that they would also support creative entrepreneurship, the development of creative hubs, design of public places and wayfinding systems. I hadn’t realized they were interested in cultivating an entire infrastructure. I guess it shouldn’t surprise me given the NEA is a partner in ArtPlace. There seems to be a desire to re-purpose existing spaces rather than new construction.

As you might imagine, they won’t support anything that doesn’t have arts and culture–and their practitioners–as central elements. At the same time, they also require local government at the city or county level as a partner to the non-profit. A government entity can only submit one proposal, which they define as:

“Eligible local government partners include counties, parishes, cities, towns, villages, federally recognized tribal governments, local arts agencies, local education agencies (school districts), or local government-run community college.”

Soooo….. as I got to finishing this entry, I realized that the deadline for this grant was March 1. I suspect the folks at my state arts organization didn’t realize this either when they sent the information out with a “please share” request. The Our Town link from the NEA home page isn’t working so it wasn’t immediately apparent the deadline had passed. I did find the application information page through other means.

If nothing else, it is a good resource for planning for the next cycle. (Which they indicate there will be.) This year the application window was December 1 to March 1. Unless you already had something in the works with your local government, it would have been a real crunch to get an application together. Let’s face it, few people are really going to be working on a grant application during the Christmas holidays.