This article explains issues to consider when exploring the concept of expanding a nonprofit organization into various geographic areas by working jointly with a local leader in those areas. This article does not address nonprofit organizations owning business franchises.
Social Franchising: Geographic Expansion of a Nonprofit
Nonprofit organizations have begun using a franchise model to expand their missions into new geographic areas. The idea essentially involves sharing best practices and intellectual property to further advance the organization’s cause.
By analogy, a company could expand its reach by establishing offices in a new geographic location or by selling a franchise to a local business. Likewise, a nonprofit organization can expand its reach by establishing a “chapter” in a new geographic location or by selling a franchise to a local, independent nonprofit organization. Using a franchise for a nonprofit organization is a relatively new model.
In a social franchise, a local organization is essentially going to a thriving organization to get its best practices and perhaps rent its brand name.
Benefits of Franchising a Nonprofit Organization
Using a social franchise model, an organization seeks to find a person in each geographic area with a common passion. This local leader will team together with the organization to start a local chapter (or “franchise”). This combines the operational strengths of the organization with the local person’s relationships and history in the community.
Challenges of Franchising a Nonprofit Organization
Using a social franchise model, an organization will encounter three main challenges: developing a repeatable operations model, identifying local leaders, and ensuring legal compliance.
1. Developing a Repeatable Operations Model
The first challenge is creating a nonprofit organization model that can be replicated in other geographic areas, using a different set of people and different community environment. Many nonprofit organizations rely on a dynamic leader who is not easily replicated and cannot be leveraged nationwide. Likewise, an approach that works in one community may not work in another. Typically, a nonprofit needs to create a few replica chapters, working out the kinks, before identifying a model that can scale nationwide.
2. Identifying Local Leaders
The second challenge is finding the right person to lead the local nonprofit chapter. The nonprofit will need to identify the specific skills and attributes needed to lead this chapter because that person will not have local oversight. While some local oversight can be accomplished through a local board, the best practice is to have close interaction with the parent organization, including frequent communications and close involvement in the operations until the new chapter is self-sustaining.
3. Ensuring Legal Compliance
The third challenge is legal compliance. Each state has its own requirements. At a minimum, states typically require registering the foreign nonprofit corporation in the state’s corporate filing office (secretary of state, etc.). States also generally require registration (e.g. attorney general’s office) of any organization soliciting funds.
Instead of having a parent organization with a presence in the state, the organization can use a model where the local chapter is its own nonprofit corporation, with its own board of directors, connected to the parent by a contract. Whatever the structure, nonprofit organizations will need contracts to govern the relationships between the parent organization and local chapters.
These challenges can be addressed by hiring a nonprofit attorney who is familiar with nonprofit compliance, contracts, and employment in multiple states.
Expanding the organization to a new geographic area is exciting, but it does have substantial costs. Fortunately, those costs are less than starting from scratch in each area, which is why many organizations are exploring this new avenue to increase the impact of their mission.
The investment of using a franchise model is usually more than naturally expanding the parent organization because of the resources needed to replicate the parent instead of leveraging the parent’s strengths in a geographic area.
Social Franchise Models
There are a variety of ways to structure a social franchise relationship. Options include using contracts or license agreements between independent organizations, creating a subsidiary nonprofit corporation, and registering a franchise.
Instead of getting caught up in the legal details, begin by focusing on your goals. What are you trying to accomplish. An attorney experienced in both nonprofit law and franchise law can listen to your circumstances and explain your options, including the associated costs for each option.