Financing Food Incubators

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• Financing Food Incubators
• 2008 Community Food Security Coalition/FoodBin
  Conference
• Carol Coren
• Business Association Mentor

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Financing is a Function Of Mission and Structure

• Financial Stability relies on multi-sectoral
  support for a business enabling environment
  equipped to support food industry entrepreneurs
• Financial Resources will be affected by program
  and service capacity, capital and the appeal of
  your vision for the incubator
• Financial Planning must explore a variety of
  revenue streams that often rely on collaborations
  and partnerships

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Food Incubator Mission

• Provide a business enabling environment for
  entrepreneurs involved in a far reaching,
  lucrative, industry with unrelenting performance
  and technology requirements

Shoals Commercial Culinary Center, AL Photo
Business Week 2007
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Vision and Value Propositions

• Support Local Economic Growth
• Create Jobs
• Link local entrepre-neurs to the food industry
  value chain
• Forge partnerships with public service programs,
  suppliers , consumers and businesses

Artisan Baking Center Kitchen Innovations,
NY Photo Business Week 2007
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Performance Benchmarks Attract Support
Northwest Ohio Cooperative Kitchen, OH Photo
Business Week, 2007

• Does it deliver a service that the marketplace
  has failed to provide at affordable prices and
  acceptable quality.
• Does it play a role as an economic development
  driver.
• Does it serve as a core component of the value
  chain that brings foods from farms to forks
  locally, regionally, nationally, internationally?
  How?

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Despite a CLEAR MISSION and VISION, most Food
Incubator Programs struggle financially to help
clients and communities

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Financing is A BALANCING ACT

• Establishing and maintaining a balance
  among these three critical components is
  essential to an organization's long-term health
  and viability.

What you do and why you do it
Your ability to do what you do Direct Services,
Technical Support, Equipment Maintenance,
Storage, Distribution, Square Footage, etc.

• What you have and how it is distributed
• Assets
• Liabilities
• Net Assets

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Incubators Are Social Enterprises

• Organization or venture that advances its social
  mission through entrepreneurial, earned income
  strategies and operates as a
• For Profit Business
• Non Profit Organization
• Hybrid Organization

La Cocina, CA Photo Business Week
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Do Traditional Business Structures Fit?
Individual Partnership LLC C-Corp Co-op
control Owner Partners Owners Shareholders, board elected officers Members, board elected from membership
capital owner Partners. Liability up to value of property Owners. Liability limited to investment in business Equity raised by selling shares Equity from members
earnings Profits to owner Shared gain(loss) by partners, based on partnership agreement Shared by owners Gain(loss) distributed to shareholders as dividends Allocated to members based on business done w/co-op in that year
taxes Taxed once as income of owner Taxed once as income of partners Taxed once either as partnership or corporation Taxed twice Taxed once as income of co-op when earned, or income of members when allocated
life Tied to owner Tied to partnership. Perpetual Continuing existence Perpetual
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Hybrid Business Structures

• MODELS
• New Generation Cooperatives
• Limited Private Partnerships
• L3Cs
• Public-Private Partnerships
• Tri-Sector Partnership
• BENEFITS
• Community Engagement
• Flexible Profit Objectives
• Financial Advantages for Stakeholders (Taxes,
  Subsidies, Markets)
• Economies of Scale

St. Paul Kitchen, MN Photo St. Paul Star Tribune
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New Generation Cooperatives

• Used primarily for value-added processing of
  agricultural commodities
• Equity to fund start-up and growth is financed
  through the sale of delivery rights If 20
  million is needed for equity capital and the
  capacity of the facility is 5 million bushels
  then the price per delivery right share is 4 per
  share
• Characteristics
• delivery rights are contracted and tied to the
  level of investment
• membership is limited to those who purchase
  delivery rights
• higher levels of equity investment by individual
  members is required
• shares that provide delivery rights can be
  transferred and can fluctuate in value.
• Marketing agreements outline duties of both the
  members and the cooperative toward each other
  with respect to the delivery, quality, and
  quantity of producers commodities. .

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Limited Private Partnerships

• Partnership limited to 35 partners
• Scale allows avoidance of SEC Registration
• Enjoy protections similar to LLCs (limited
  partners enjoy protection from liability)
• Often have timetable for existence and dissolve
  or alter when that timeframe expires
• Typically form to invest in real estate, oil and
  gas drilling, research and development, equipment
  leasing, and other businesses.

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L3C Low-Profit Limited Liability Co. THE
FOR-PROFIT WITH A NONPROFIT SOUL

• Have the liability protection of a corporation,
  the flexibility of a partnership and the ability
  to be sold in pieces.
• Bylaws provide mission statement indicating that
  the enterprise is to further a socially
  beneficial purpose
• NOT tax-exempt but eligible for a philanthropic
  Program Related Investment (PRI) loan or
  infusion of capital
• VT now permits this structure and firms can form
  there
• L3C is the same as organizing as a LLC with a
  requirement that the designation be indicated
  when the articles of organization are filed and
  the name of the enterprise declares
• must include the brand mark word L3C
• www.americansforcommunitydevelopment.org

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Public Private Partnerships

• Agreement between public agency and a private
  sector entity, often regarding the provision of
  public services or infrastructure.
• Example Riverside CA Library City owns
  buildings and Library Systems and Services, Inc.,
  a Maryland firm operates the system and is
  responsible for all library employees, except for
  the county librarian, janitorial service, and
  landscape maintenance.
• Oregon State University owns
• OR Food Innovation Center and
• leases portion of it to the
• Oregon Department of Agri-
• culture for labs and testing.

Wasco Specialty Kitchen, WA
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Public Private Development PartnershipsPotential
to Operate As An Economic Development Service
Provider

• Public sector entity enters into partnership with
  private sector agency to develop a product, to
  put a new technology to use or develops a service
  to address problem such as

• Need for a health product to treat a disease
  found only in poor and developing nations
• Need to introduce a new production technology or
  product such as a Gatorade
• Need to advance applications of a security
  technologies to monitor status of food while it
  is being shipped.
• Need to transfer technology from a government
  research lab to the marketplace.

Overbrook Environmental Education Center (OEEC)
Kitchen , PA
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Tri-Sector Partnerships

• Business entities, nonprofit organizations
  and government working together to organize,
  start and operate programs that put communities
  at the centre of development, and deliver real
  and sustainable benefits for all. This model is
  used throughout the world for development
  purposes.

 
Jubilee Project, TN
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Myths About Nonprofit Financing

• 1. Start-up success relies on
• grant-getting and
• raising contributions
• 2. There is a grant for every
• problem and a program
• for every need
• 3. Budget transfers can serve in lieu of a line
  of credit and be repaid
• Endowment funds are without strings
• Qualified customers are lined up at the door

Pacific Gateway Center, HI
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Financing Incubators Needs Three Full Pots!
Unrestricted Revenue Earned
Contributed
Temporary and Restricted Revenue Purpose
Timing
Permanent Restricted Revenue
Unrestricted Net Assets
Temporarily Restricted Net Assets
Permanently Restricted Net Assets
Source Nonprofit Finance Fund
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Source Nonprofit Finance Fund
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Statement of Activities Reveals

• Revenue Dynamics Where does the organizations
  money come from? Is it well diversified or at
  risk? Do revenue streams appear
  reliable/consistent?
• Cost Dynamics What levers does the organization
  have in its control to manage expenses? How hard
  is it to tighten the belt? Is management
  responsive to operating changes and prepared to
  make difficult decisions?
• Profitability Savings Does the organization
  cover its costs? How large are surpluses/deficits
  relative to revenue? Is the agency saving? If so,
  is it enough?

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La Cocina, Kitchen, CA
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CASH FLOWS INCOME STATEMENT INFLUENCES
BALANCE SHEET
YR 2 Financial Position
YR 1 Financial Position
Statement of Cash Flows
Statement of Activities
Earned Contributed
Source Nonprofit Finance Fund
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Statement of Position Reveals

• Health of Assets
• Is the distribution of assets appropriate, given
  the core business?
• Is the organization investing in its fixed
  assets?
• How leveraged are they?
• What is the composition of net assets?
• How much is unrestricted and liquid?
• Liquidity
• Does the agency have enough cash to cover current
  obligations?
• How well are they managing receivables?
• Are they asking others to pay the bills?

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Filling up the Money Pots
Temporarily Restricted Contributions
Unrestricted Contributions
ENDOWMENT Permanently Restricted Contributions
Earned Revenue
Temporarily Restricted Net Assets
Permanently Restricted Endowment
Investment Income
Net Assets Released
Unrestricted Net Assets
Operating and non-operating Expenses
Source Nonprofit Finance Fund
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Financial Instability SolutionsWays to Fill the
Money Pots

1. Run Leaner and Make Money
2. Grow
3. Launch an earned income venture
4. Liquidate Assets
5. Build an endowment
6. If your purpose is to spin off businesses,
   devise a way to capitalize from your clients
   success for a Reserve Fund

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Ways Your Incubator Might Grow
Transformative
Organic
None
Negative

• Presumably no change in business model
• The most predictable option (and least likely to
  fail)
• Still requires planning and environmental
  changes affect business results

• Change in business model is incremental, if at
  all
• Funded with surpluses, debt
• No golden rule, but seldom greater than 10-15
  sustained annual rate

• May or may not change business model
• Often the hardest to manage, as old cost
  structure becomes obsolete
• Financial implications are not as obvious as one
  might think

• Changes the way you conduct business
• Typically requires outside/one-time source of
  funding/financing
• May or may not represent large percentage growth

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Source Nonprofit Finance Fund
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Liquidation is Easier Than It Sounds

• Incubators commitment to property and equipment
  is integral to program delivery
• Being a landlord of sorts is one of your
  businesses perhaps you should treat it as a
  subsidiary. Then If something breaks, the
  landlord that you established for this purpose
  can fix it.
• Reserves restricted for ongoing maintenance and
  replacements might cause complications if the
  building or equipment is gone.

Former Nuestra Culinary Ventures, MA Photo Erik
Jensen for Boston Globe
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Are Endowment Funds A Safety Net?

• The return on investment involved in raising an
  endowment might not be as great as the return
  from other fundraising efforts
• A sizable endowment is required to yield
  significant interest and dividends
• 1 million principal _at_ 5 will yield 50,000 per
  year (gross)
• Building and managing endowments can take energy
  away from mission and programs
• An unrestricted INVESTMENT FUND might provide
  greater flexibility and not demand the management
  reporting and diligence that an endowment gift
  requires

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Board and Staff Commitments to Financing

• Review the fundamental concepts and structure of
  nonprofit financial statements
• Understand how to analyze this information for
  your own organization
• Present and Explain your financial information to
  your staff, constituents, board and potential
  funders
• Find and implement ways to generate recurring
  revenue from your intellectual property
  investment in your clients and your communities

Kitchen Incubator (Kitchen Inc.), TX
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For Further Information

• Contact Information
• Lou Cooperhouse, Director
• Diane Holtaway, Associate Director, Business
  Development
• Carol Coren, Business Association Mentor
• PH 856-459-1900
• 450 E. Broad Street
• Bridgeton, NJ 08302
• foodinnovation.rutgers.edu