Managing the End of a Funding Relationship

Contents
The Good Goodbye?
Three Recommendations for an Effective Funding Exit
    1. Develop a revenue plan
    2. Use transition grants
    3. Broaden replacement funding options
Where to Learn More

 

By Tom Triplett, Principal Consultant with Fieldstone Alliance. Tom specializes in helping nonprofits develop financial strategies for long-term sustainability.

The Good Goodbye?
FOUNDATIONS RARELY fund a project or organization forever. Even though the end of a funding relationship is normal, it's still often stressful for both grantmakers and grantees. Is there such a thing as the good goodbye? According to a superb new guide from GrantCraft, “The Effective Exit: Managing the End of a Funding Relationship” the answer is yes.

Authors Anne Mackinnon and Jan Jaffe, who interviewed dozens of grantmakers, assert that "an effective exit takes skill, planning, and a dose of strategic foresight. But, done well, it can add value to a project and leave a grantee organization in a strong position."

In this issue of Tools, I'll highlight some of the recommendations in "The Effective Exit" and give additional suggestions from our experience at Fieldstone Alliance as consultants hired to help nonprofits in this situation. Hopefully both grantmakers and grantees will find the following insights useful.

Three Recommendations for an Effective Funding Exit

1. Develop a revenue plan
Human nature being what it is, it's understandable that some nonprofits are in denial when a major grant is actually coming to an end. To deal with this type of reaction, grantmakers interviewed for the GrantCraft guide give a consistent message to their colleagues, "Talk about exiting early and often....Asking grantees where they are in terms of identifying other funders can be one of the most important uses of reporting requirements."

We at Fieldstone Alliance contend that funders can have even more impact if they support their grantees in developing a long-range revenue or business plan that identifies replacement funding sources. Having such a plan is more likely to sustain the organization for the future, which in turn, extends the funder's investment.

This brings me to our second recommendation.

2. Use transition grants
The GrantCraft guide profiles many funders who provide extra "transition grants" to help grantees with organization development and professional learning. Nonprofits and foundations alike can learn from these examples and get ideas for what support is most appropriate for their situation.

Fieldstone Alliance recently provided revenue restructuring consultation to a number of grantees of three national foundations. From this, we’ve learned just how valuable transition grants can be. We add the following recommendations to the guidebook's suggestions:

1. While the bulk of funding for the consulting came from the grantmakers, we found it is important that the grantees be expected to spend some of their own money for this purpose. Having their own dollars invested helps to keep organizations interested and committed to the process.
2. For the same reason, we recommend that the transition grant go to the grantee who then hires a consultant that the grantee selects (rather than have the grantmaker hire the consultant directly).
3. The transition grant should encourage the grantee to conduct a truly broad-based analysis of revenue sources.
4. After completing a broad alternative revenue analysis, organizations should develop a specific business plan to implement the results of the initial analysis.

3. Broaden replacement funding options
A common reaction we've seen is the grantee who immediately begins looking for a new donor (or donors) to replace the exiting one. This might pay off for a few fortunate nonprofits, but most often it doesn't. One of the foundation staff interviewed for "The Effective Exit" suggests a possible reason why grantmakers are reluctant to step in to replace another grantmaker—each has its own funding priorities.

The guide suggests some positive steps to overcome this reluctance. But we believe it's more effective to encourage nonprofits to consider a broad menu of funding sources. Philanthropy should never be viewed as the only revenue source.

We value “hard dollar” sources of revenues—usually earned income—that aren't so dependent on the giving priorities of foundations. Earned income won’t work for every organization, but we believe it should at least be considered by every nonprofit.

We've found that most grantmakers respect this approach. They prefer that their grantees have revenue sources that are not foundation dependent. Some grantmakers have told us that they are more likely to fund a nonprofit that demonstrates strong “market” support through earned income.

In the end, nonprofits need to evaluate potential revenue sources that fit their unique situations and are not merely "more of the same." Foundations can extend their impact as they say "goodbye" by helping grantees view this transition as an opportunity to look at ways to move toward long-term financial sustainability.

Where to Learn More

The Effective Exit: Managing the End of a Funding Relationship (read the free PDF online)
Special features include:

• Examples of exit strategies from four grantmakers
• A "healthy nonprofit" checklist
• A case study: Breaking the ice with new funders

Financing for the Long-Term
Beyond the bake sale: innovative long-term sustainability options.
(Field Tip direct mail card, January, 2008. Read it free online.)

Avoiding Knee-Jerk Reactions to a Crisis
Checklists of things to do and questions to ask when times suddenly get very bad.
(Tools You Can Use e-newsletter, September 5, 2007. Read it free online.)

Financial Leadership for Nonprofit Executives: Guiding Your Organization to Long-term Success by Jeanne Bell, Elizabeth Schaffer. Published by Fieldstone Alliance.
This book gives Executive Directors the framework, specific language, and processes needed to lead with confidence and create an effective nonprofit business that strikes the balance between mission and money.

 

Tom Triplett
Fieldstone Alliance

January 24, 2008

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