Financing Food Incubators
2008 Community Food Security
Coalition/FoodBin Conference
Carol Coren
Business Association Mentor
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 entrepreneurs 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,
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nationally, internationally? How?
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
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
o New Generation Cooperatives
o Limited Private Partnerships
o L3Cs
o Public-Private Partnerships
o Tri-Sector Partnership
• BENEFITS
o Community Engagement
St. Paul Kitchen, MN
o Flexible Profit Objectives
o Financial Advantages for Stakeholders (Taxes,
Subsidies, Markets)
o Economies of Scale
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:
1.
2.
3.
4.
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.
5. 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
o 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
o must include the “brand mark” word L3C
o 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.
o 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.
o Oregon State University owns
OR Food Innovation Center and
leases portion of it to the
Oregon Department of Agriculture for labs and testing.
Wasco Specialty Kitchen, WA
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Public Private Development Partnerships
Potential 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
Overbrook Environmental Education
Center (OEEC) Kitchen , PA
o Need for a health product to treat a disease
found only in poor and developing nations
o Need to introduce a new production
technology or product such as a “Gatorade”
o Need to advance applications of a security
technologies to monitor status of food while
it is being shipped.
o Need to transfer technology from a
government research lab to the marketplace.15
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
Pacific Gateway Center, HI
for every need
3. Budget transfers can serve in lieu of a line of
credit and be repaid
4. Endowment funds are without strings
5. Qualified customers are lined up at the door
Financing Incubators Needs Three Full Pots!
Unrestricted Revenue
Earned
Contributed
Temporary and
Restricted Revenue
Purpose
Unrestricted
Net Assets
Source Nonprofit Finance Fund
Timing
Temporarily Restricted
Net Assets
Permanent Restricted
Revenue
Permanently Restricted
Net Assets
ABC Center
STATEMENT OF ACTIVITIES (REVISED)
Years ended June 30, 2003
($ in Thousands)
Breakdown of Revenue:
Earned vs. Contributed
Temp. restricted revenue has met
donor-imposed restrictions
OPERATING ACTIVITY
Operating Revenue
Unrestricted
Temporarily
Permanent
Total
Earned
Investment income
Program Fees & Tickets
Rental Income
Government earned
Earned operating revenue
$7
410
30
10
457
-
-
7
410
-
-
10
457
Contributed
Individual
Foundations & Corporations
Government
Special events, net
Net Assets Released from Restrictions
Contributed operating revenue
248
162
47
44
152
653
(152)
(94)
-
248
220
47
44
0
559
1,110
(94)
-
1,016
550
39
90
490
-
-
-
1,169
-
-
1,169
(59)
93
(152)
-
-
(59)
597
(597)
-
-
-
-
0
445
(691)
0
(246)
Total Revenue
Natural classification of expenses
Determine true Operating Surplus /
Deficit
Non-operating revenue segregated
and placed “below the operating
line”
Operating Expenses
Personnel
Professional Fees
Occupancy
Interest
Support
Total Expenses
Surplus/Deficit Before Depreciation
Depreciation Expense
Surplus/Deficit After Depreciation
-
58
(152)
NON-OPERATING ACTIVITIES
Unrestricted non-operating revenue/expenses
0
(e.g. capital campaign receipts/releases)
Net gain (loss) on sale of assets
Source Nonprofit Finance Fund
Change In Net Assets
Statement of Activities Reveals
• Revenue Dynamics: Where does the organization’s
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?
La Cocina, Kitchen, CA
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CASH FLOWS & INCOME STATEMENT INFLUENCES
BALANCE SHEET
YR 1 Financial Position
Statement of Cash Flows
YR 2 Financial Position
Cash flows from operating
Cash flows from investing
Cash
Cash flows from financing
Cash
Assets
Beginning Cash
Assets
Ending Cash
Statement
of Activities
Revenue
Liabilities
Liabilities
Earned
Contributed
Expenses
Surplus/Deficit
Net Assets
Personnel
Professional
Occupancy
Interest
Support
Change in Net Assets
Source Nonprofit Finance Fund
Surplus/Deficit
Net Assets
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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Temporarily
Restricted
Contributions
Filling up the Money Pots
Unrestricted Contributions
Earned Revenue
Temporarily Restricted
Net Assets
Permanently Restricted
Endowment
Net Assets Released
Investment Income
Unrestricted
Net Assets
Operating and nonoperating Expenses
Source Nonprofit Finance Fund
ENDOWMENT
Permanently
Restricted
Contributions
Financial Instability Solutions:
Ways to Fill the Money Pots
1.
2.
3.
4.
5.
6.
Run Leaner and Make Money
Grow
Launch an earned income venture
Liquidate Assets
Build an endowment
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
• Changes the way
you conduct
business
• Typically requires
outside/one-time
source of funding/
financing
• May or may not
represent large
percentage growth
Source Nonprofit Finance Fund
Organic
None
Negative
• Presumably no
change in
business model
• May or may not
change business
model
• Funded with
surpluses, debt
• The most
predictable option
(and least likely
to fail)
• Often the hardest
to manage, as old
cost structure
becomes obsolete
• No “golden rule,”
but seldom greater
than 10-15%
sustained annual
rate
• Still requires
planning and
environmental
changes affect
business results
• Financial
implications are
not as obvious as
one might think
• Change in
business model is
incremental, if at
all
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Liquidation is Easier Than It Sounds
• Incubator’s 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
o A sizable endowment is required to yield significant interest
and dividends
o $1 million principal @ 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
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