Being Entrepreneurial - A Business Guide for CILS · BEING ENTREPRENEURIAL New York State Small Business Development Center and the The CIL Management Center of the Western New York

BEING ENTREPRENEURIAL

New York State Small Business Development Center

and the

The CIL Management Center of the Western New York Independent Living Project, Inc.

A B U S I N E S S G U I D E F O R C I L S

ACKNOWLEDGEMENTS

This document is a joint project of the RRTC, WNYILP, NIDRR, NYSSBDC and the authors include the following individuals and institutions:

King, James L., NYS SBDC, SUNY Central AdministrationBrigham, William, NYS SBDC, SUNY AlbanyHefka, Michael, NYS SBDC, SUNY BuffaloMcCartney, Susan, NYS SBDC, SUNY BuffaloMorley, Thomas, NYS SBDC, Mercy CollegeNowicki, Raymond, CPA, Nowicki & Associates, Buffalo, NYThomason, Cindi, NYS SBDC, SUNY Buffalo

The Rehabilitation Research & Training Center on Independent Living Management is a member of The Family of Agencies of The Western New York Independent Living Project Inc.

This is a publication of the Rehabilitation Research & Training Center on Independent LivingManagement which is funded by the National Institute on Disability and Rehabilitation Research of the US Department of Education under grant number H133B000002. The opinions contained in this publication are those of the grantee and do not necessarily reflect those of the Department of Education

© 2004 by the New York State Small Business Development Center, Albany, NY. All rights reserved.© 2004, Rehabilitation Research and Training Center on Independent Living Management (RRTC-ILM), All rights reserved.

Permission is given for duplication or reproduction either mechanically or electronically of any portionof this manual, providing that the following credit is given: Reproduced by permission from materialsdeveloped by the Rehabilitation Research and Training Center on Independent Living Management(RRTC-ILM) and the NYS SBDC.

The NYS SBDC is partially funded by the US Small Business Administration. The support given by theSBA through such funding does not constitute an express or implied endorsement of the co-sponsor orparticipant’s opinions, products or services.

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Table of Contents


Quick Start Guide . . . . . . . . . . . 3

Preface – A New Way . . . . . . . . 5

Introduction. . . . . . . . . . . . . . . . 9

Social Entrepreneurship? . . . 10

Background of the Project. . . 13

Is An Entrepreneurial Venture For Your CIL? . . . . . . 14

Strategic Planning and For-Profit Ventures – Is It For Your CIL? . . . . . . . . . . . . . 15

How To Integrate the VentureInto Your CIL Mission . . . . . . . 17

Tax Considerations: An Overview . . . . . . . . . . . . . . 24

Basic Business Considerations . . . . . . . . . . . . 24

Tax Considerations . . . . . . . . . 26

Prohibition Against Private Inurement (personal benefit): . . . . . . . 26

Lobbying Activities . . . . . . . 26

Quid Pro Quo Contributions . . . . . . . . . . . 27

Unrelated Business Income Tax (UBIT) . . . . . . . 27

Business Structure and Legal Form . . . . . . . . . . . . . 28

The CIL "Controlling" A Not-For-Profit (NFP) . . . 29

The CIL with a For-Profit C-CorporationSubsidiary . . . . . . . . . . . . . . 29

The CIL With an S-Corporation Subsidiary . . . . . . . . . . . . . . 30

The CIL as a Partner in aPartnership (including limitedpartnerships) . . . . . . . . . . . 30

Financial Statement and Disclosure Considerations 30

The Business Plan: The CIL’s Primary BusinessCommunication. . . . . . . . . . . . 31

Why Does a CIL Need aStrategic Business Plan?. . . . 31

Strategic Business Plan –Executive Summary . . . . . . . . 33

Business Description. . . . . 35

Market Analysis . . . . . . . . . 35

Product or Service Analysis . . . . . . . . . . . . . . . . 38

Competition . . . . . . . . . . . . 39

Marketing Strategy . . . . . . 40

Operations . . . . . . . . . . . . . 43

Management. . . . . . . . . . . . 45

Finances . . . . . . . . . . . . . . . 46

Supporting Information . . . 48

Timing . . . . . . . . . . . . . . . . . 49

Exhibits/Appendices. . . . . . 49

Wrapping up the Business Plan. . . . . . . . . . . 49

Summary. . . . . . . . . . . . . . . 50

Sample Balance Sheet . . . 51

Sample Income/Operating Statement . . . . . . . . . . . . . . 52

Sample Cash Flow . . . . . . . 53

The CIL and SBDC Partnership In Action . . . . . . . 54

Case Study #1 – The Southwestern Center for Independent Living(SWCIL) - Minnesota . . . . . 55

Case Study #2 – Community Resources for Independence (CRI) CIL -Pennsylvania. . . . . . . . . . . . 57

Case Study #3 – The Lynchburg Area Centerfor Independent Living(LACIL) – Virginia . . . . . . . . 59

Case Study #4 – Independent Living Center of Hudson Valley (ILCHV) –New York . . . . . . . . . . . . . . . 61

Appendix A . . . . . . . . . . . . . . . 63

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A BUSINESS GUIDE FOR CILS

Is entrepreneurship for your CIL?There are no guarantees inbusiness. There is no way toeliminate the risks associatedwith starting a small business.But, you can improve yourchances of success with goodplanning, preparation, andinsight. Start by evaluating yourstrengths and weaknesses.Consider each of the followingquestions:

Is your team together?It will be entirely up to your CILto develop projects, organizetime, and follow through ondetails.

How well do you get along with different stakeholders? Businesses need to developworking relationships with avariety of stakeholders, includ-ing boards, customers, vendors,staff, bankers, and other pro-fessionals (such as lawyers,accountants or consultants).

Can your CIL deal with ademanding client, an unreliablevendor, or a cranky receptionistif business interests demand it?

Can you make decisions? Business operations requiredecisions constantly and oftenquickly, independently, andunder pressure.

Do you have the physical and emotional stamina to run a business? Business operations can beexciting, hard work. Can busi-ness requirements specify theworkdays every week?

Can you plan and organize? Research indicates that poorplanning is responsible for mostbusiness failures. Good organi-zation of financials, inventory,schedules, and production canavoid many pitfalls.

Quick Start Guide


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Is the commitment strongenough? Running a business can weardown individuals and organiza-tions. Some business teamsburn out quickly from having tocarry all the responsibility forthe success of the business.Strong motivation and commit-ment help the organization survive slowdowns and periodsof frustration.

How will a business affect your CIL?The first years of businessstart-up will be hard on theorganization. It is important forteam members to know what to expect. The team must beable to trust that the commit-ment will bring success. Theremay be financial strain until the business hits breakeven andbecomes profitable. This couldtake months or even years. Canthe parent CIL adjust to a drainon assets and some additionalrisk in the short-term, with the potential for long-term success?

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PREFACE – A NEW WAY

A new way…Can a CIL operate in the for-profit world? An analysis ofalternatives, mission, culturesand history, can profits furtherCILs work?

The collaboration between theNew York State Small BusinessDevelopment Center (NYSSBDC) and centers for inde-pendent living (CILs) began in2001 with two training eventsdesigned to introduce not-for-profit centers for independentliving to the concept of businessplanning. The NYS SBDC andthe Rehabilitation Research &Training Center on IndependentLiving Management (RRTC-ILM), a member of the WesternNew York Independent LivingProject, Inc. family of agencies,established a relationship toprovide training and businessassistance to CILs interested indeveloping for profit ventures.Following these training events,three CILs were selected toreceive in-depth assistance tostructure and develop a for-profit venture within their CILs.This manual describes projects

in Erie, Pennsylvania,Lynchburg, Virginia, andMarshall, Minnesota that suc-ceeded with the help of repre-sentatives from the NYS SBDC,their local SBDC, and the RRTC-ILM. The outcomes of thesecase studies, along with thegeneral qualitative evaluationsfrom the training and advise-ment services, measure thesuccess of this collaboration.

A few years ago, a friendreferred a CIL director to mewho wanted to discuss businessopportunities. I did not knowwhat CIL stood for at the time.But, in the world of acronymsoup known as government thatwas not unusual. That was myintroduction to Douglas Usiak,Executive Director of theWestern New York IndependentLiving Project, Inc. (a CIL) andthe development of a series ofprojects that had me workingand experiencing tremendoushighs and extreme disappoint-ments.

Doug gave me a quick introduc-tion to the work of CILs. . Myfirst impression was that of abunch of well-intentioned peo-ple who see the world as it



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‘ought to be’ rather than thesometimes harsh reality of public sector programs andfunding. The key thing thatcaught my interest was thatthese people were not sittingand complaining. They werelooking for new, innovative, andeven untried ways of developingresources to ensure that theirwork would not be interruptedbecause of public funding losses.

I am the New York StateDirector of the Small BusinessDevelopment Center. We are ahigher education-based (StateUniversity of New York) busi-ness advisement, training andresearch organization. Lastyear, we advised 20,000+ entre-preneurs, about evenly dividedbetween start-ups and existingsmall business owners. Wetrained another 22,000+ entre-preneurs at 452 training eventsthroughout New York State. Ourresearch is usually for a specificbusiness. But we get involvedwith any topic that affects thesmall business sector. Lastyear, the small business ownerswe advised, invested $282 mil-lion in their businesses affect-ing 13,142 jobs.

Doug Usiak and I agreed thatthe SBDC would become one ofthe partners of the Rehabilita-tion and Research and TrainingCenter on Independent LivingManagement, a member of theWestern NY Independent LivingProject, Inc. family of agencies).The SBDC project included con-ducting two training events,wherein CILs would be intro-duced to the for-profit busi-ness-planning model. We wouldtest the model’s application toCILs. We would observe thecompatibility of profit decision-making and operations with CIL culture.

The training events weredesigned to advance CIL man-agers’ understanding of imple-menting and successfully oper-ating a for-profit venture withina CIL. While for-profit endeav-ors may be viewed as a majordeparture from the mission andorganizational culture of CILs,they are a valuable alternative ifCIL services are to be main-tained and expanded in today’schallenging environment.

Two training events were held(August, 2001 in Buffalo, NY andJanuary, 2002 in Las Vegas,

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NV). From those participating,two or three CILs were selectedfor in-depth development of astrategic business plan tostructure a for-profit venturewithin the CIL. The outcomes ofthese case studies, along withgeneral qualitative evaluationsfrom the training and advise-ment services, serve as meas-ures for this section of the proj-ect. Outcomes are being evalu-ated based on contributions ofthe subsidiary to the parent CILorganization and based on theobjectives of that CIL. (Casestudies of the specific effortsare included in this workbook)

Some of the project’s anticipatedoutcomes included:

• Measurement of financial contributions

• Revisions to CIL operating procedures

• Broadened vision for the CIL organization

• Greater and improved community interaction

• More pro-active internal governance of the CIL

• Greater public exposureand enhanced image forthe CIL, and

• Management revisions to apply the business modelto CIL operations.

After the training events, inter-ested CILs were provided with a questionnaire to solicit theirconceptual business proposals.Interviews were conducted toassess the receptivity andpotential impact of SBDCexpertise. A selection teamcomposed of RRTC-ILM andSBDC staff ranked each propos-al and selected four viable candidates. We culled this listfurther, approving three CILsfor this project.

The training sessions encour-aged questions and identifiedvarious concerns that had to beconsidered before a CIL pro-ceeded to launch a for-profitbusiness. These questions wereanswered through longer-termconsulting engagements or inone-to-one meetings with busi-ness mentors from the SBDCs.While the NYS/SBDC is the leadSBDC in each project, the geo-graphic dispersion of the partic-ipating CILs necessitated theinclusion of local SBDC staff for localized services. At eachparticipating CIL, a resource



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team coordinator fromNYS/SBDC conducted needsassessments, proposed a service plan to identify neededassistance, and acted as theliaison between the CIL, localSBDC services and research /technical expertise.

As participating CILs enteredthe consulting phase of the pro-gram, outcomes for the projectwere based upon identifiedobjectives. While growth infinancial viability was anticipat-ed, additional organizationalobjectives that had substantialimpact upon the participatingCIL were pre-identified. Thethree CILs selected to partici-pate in this project were locatedin Pennsylvania, Virginia andMinnesota. The selection com-mittee estimated the probabilityof success for each project andsummarized perceived obsta-cles and outcomes.

The projects are summarizedbelow. They are described inmore detail in the Case Studysection of this workbook.

Pennsylvania was the site of anurban real estate deal to pur-chase the building that the CIL

leased, establishing the CIL as a tenant/owner, developing theCIL as a facility manager andsubletting extra space to othertenants. Initial data indicatedthat the building, in relativelygood shape, would spin off rev-enues sufficient to eliminate theCIL’s rent and encourage facilityexpansion, reduce the CIL’scosts, thereby lowering over-head. At the outset, this projectwas viewed as a guaranteedsuccess, with minimal risk,substantial fiscal return, butlimited application to the fur-therance of the CIL’s mission.

Virginia was the site of a com-munity-based project to providecomputer technical expertiseand support. While market dataindicated customer needs andbusiness viability, the CILlacked unique skills or specialadvantages that could securethe business model or provide acomparable advantage to theCIL over time. Due to the gener-ic nature of the business con-cept, this project had greaterrisk and lowered expectation ofsuccess. The contributions tothe CIL’s mission were per-ceived as initially limited but

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with greater potential as thebusiness matured.

Minnesota was the site of aproject that was fairly remotebut was viewed as ideally com-patible with the CIL mission.This project focuses on pre-fab-ricated ramp constructiondesigned to meet ADA codes.The business had limited com-petition, significant competitiveadvantage, and excellent mar-ket potential and commercialviability. The project was pre-identified as the project with thegreatest long-term potentialwhile directly contributing to itsCIL’s mission.

INTRODUCTION

This workbook is intended toassist CILs in evaluating theirpotential to develop and operatea for-profit entity for the benefitof their not-for-profit (NFP) CIL.The idea of being entrepreneur-ial has great appeal for manyorganizations for a wide varietyof reasons. These may rangefrom financial independence, togetting rich, to being in charge,or to better meet the mission of

the CIL during a period ofdeclining or stagnant support.

This project gathered numerouspeople together to contributetheir ideas, share expertise andexplore the unique obstaclesconfronted by CILs across thenation. Each participating CILagreed to undergo a significanteffort to analyze a particularbusiness concept for a profit-making venture and share thatexperience. The experiences ofparticipating CILs have beenincorporated in this workbookto further the understandingand value of this project. Forthat willingness and commit-ment, we thank each personand organization that attendedone of the three workshops wepresented, as well as the fiveCILs that choose to more fullyparticipate by pursuing or start-ing a business.

CILs going entrepreneurial per-formed just like the small busi-ness sector. Some CIL projectsnever launched (died duringdiscussion). Others started, butdid not attain success. Othersachieved their objectives andattained success.



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It is our hope that this work-book will stimulate your CIL’sthinking and help to avoid mostof the pitfalls that result inadded risk, business problemsand failures. Applying soundfor-profit business techniquesto the operations of a CIL canyield significant benefits, even ifa separate for-profit venture isnot launched or operated by theCIL. Whatever your CIL decides,good luck.

SOCIAL ENTREPRENEURSHIP?

An entrepreneurial venture by aCIL (a not-for-profit organiza-tion) may support the CIL’s mis-sion or simply advance priorityservices through added finan-cial support. It is important todetermine the CIL’s motivationfor pursuing a business venture,and define success in advancefor the endeavor. The idea of‘social entrepreneurship’ com-bines the passion of a socialservice mission with business-like discipline, innovation, anddetermination to achieve theefficiency associated with theprivate sector.

CIL entities going entrepreneurialblur the public/private sectorboundaries. Social entrepre-neurship includes social pur-pose business ventures, for-profit community businessesthat meet a social need, andhybrid organizations, which mixnot-for-profit and for-profit ele-ments (e.g. a homeless shelterstarting a business to trainemployees for a major hotel inhospitality skills). For CIL man-agement, the willingness toadopt, embrace, harness anddirect business attributes to theCIL can develop new models ofservice delivery, and mecha-nisms to evaluate existing serv-ices. It can become an agent ofchange within the social servicemission.

What is entrepreneurship?Entrepreneurship is the drivingforce behind the processes thatcreate economic activity. PeterDrucker said, "entrepreneursmay not cause change, but arethe opportunists who capitalizeon change (consumer prefer-ences, technology, style, opinion, etc.)."

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It is important to understandthe opportunities that changeprovides for CILs. Will a busi-ness change a CIL or provide aresponse to changes that aretaking place in the market-place? What change must yourCIL understand?

Every business does not repre-sent entrepreneurship. Theopening of a franchise locationusually does not have the inno-vation and change elements ofentrepreneurship. For CILs,innovation and change mayoccur in the CIL rather than inthe business venture.Resourcefulness distinguishesentrepreneurial managementfrom administrative manage-ment. Entrepreneurial manage-ment pursues opportunitieswith less regard to neededresources, presuming additionalresources can be obtained if theopportunity has a sound busi-ness justification.

Understanding these differ-ences is important for CILs.Usually CILs are administrative-ly managed. An entrepreneurialCIL reconciles divergent man-agement styles and focuses

upon the positive contributionsof each style for longer-termsuccess. While not mutuallyexclusive, administrative andentrepreneurial managementstyles must co-exist if CILs areto prosper. Each managementstyle can benefit from the otherstyle for survival. Agreementwithin the CIL Board, manage-ment and staff, to pursuechange brought about by entre-preneurship will change theCIL’s organizational culture.

CILs have a social purpose andmission that are integral toongoing success. Mission-relat-ed impact is a critical measureof the evaluation for CILs whenexploring entrepreneurship.Ideally, profits can be justifiedbecause of the added support tothe CIL’s mission. The profits, oravoided costs, can have positiveimpacts upon the CIL in termsof quantity and quality of servic-es and improved lifestyles ofconsumers.

A CIL’s evaluation of an entre-preneurial activity includesunderstanding of the marketand the marketplace for theopportunity of success. CIL’s



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usual organizational mentalitydistributes resources. It doesnot sell them for value as abusiness. CIL support is mostoften driven by community needand social commitment, not bydemand. The ‘market factors’within CILs are not disciplinedcompared to business markets.

Public benefit organizations,such as CILs, seek to identifyneeds and improve or enhancethe lives of clients and servicerecipients. In business, thefocus on needs is defined bychoice and characterized bypreference. This notion of needpreference is central to entre-preneurial success.

The challenge for CILs is simi-lar to entrepreneurs - the pur-suit of a goal (business idea orservice mission), but not beyonda point considered reasonable.CILs should set specific goalsand attain buy-in from theentire organization if realisticexpectations of results are to be attained.

Businesses can be successfulby making small, incrementalinnovations or changes to exist-ing products or services.

Success does not requirewholesale or dramatic change.A small change can producestriking results. The strategicplan should be readily under-stood and garner the requiredcooperation and support withinthe organization to be successful.

Entrepreneurs are typicallycharacterized by scarce capital,which does not limit theirefforts. This is often due to theparticipation of others. If CILsare to be entrepreneurial, thenthe critical characteristics tolook for include: collaboration,organizational involvement andparticipation. It is often neces-sary to bring others into thebusiness venture to addressstrategic requirements. Forexample, if the CIL has produc-tion capability but lacks a distri-bution network, perhaps anoth-er organization is needed tomarket the product.

The CIL should understand thestrengths and weaknesses ofthe organization and anticipatechange. The level of change,innovation, and opportunity mayforce the CIL to re-examinebasic operations, test assump-tions, challenge ideas, share

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information and draw on thecollective experience, skills andknowledge. Entrepreneurs pur-sue resources (from others) anduse them to effect change. If aCIL is committed to providingservices in the future, no matterwhat the level of public support,then an entrepreneurial attitudeshould be explored.

This workbook provides CILmanagement with questions toask when considering a changeto enhance their CIL’s stability.Most people are content withdoing the same thing, whetherin the public or private sector.Change brings risk about theunknown. Acceptance of riskcan be difficult for organizationsand individuals. The key tobeing entrepreneurial is theability to evaluate risk, plan forcontingencies and refine theunknown into an expectedfuture outcome. This process isknown as strategic planning andis the focus of this workbook.

BACKGROUND OF THE PROJECT

The business advisors providingexpertise to CIL entrepreneurs

answered many of the samequestions raised by entrepre-neurs in the private sector. Itwas recognized that, if the levelof risk could be overcome, theopportunity to advance the mis-sion of the CIL by structuring afor-profit unit would benefit theconsumers and the community.The question of accepting riskinitially started out as a second-ary consideration, because abasic and incorrect assumptionwas made - that project partici-pants were pre-committed toentrepreneurial development.Risk proved to be the criticalquestion for every CIL in theproject.

The participating CILs werescreened from a large pool ofapplicants who were aware ofthe changes effecting publicbenefit corporations. They wereselected to represent a cross-section of the entrepreneurialprocess. This assumed commit-ment by CILs (management,staff and Board) was anticipatedafter internal questioning, butwas soon recognized as nothaving been committed to priorto training. The unexpected lackof commitment to accept risk



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was an error. Training wasenhanced with each event withgreater inclusion of risk man-agement with the CILs. Boardmembers were more activelyincluded to help build internalsupport for the entrepreneurialactivity. The management andBoard of Directors for mostCILs were not in full agreementon the advisability of operatinga for-profit venture within theCIL. This conflict was consis-tently the most serious obstacleconfronted by the CILs who par-ticipated in this project.

IS AN ENTREPRENEURIALVENTURE FOR YOUR CIL?

A discussion format was used ineach of the three multiple daytraining events offered to inter-ested CIL managers and Boardmembers. This introduction tothe project selection processstimulated discussion. Itbecame apparent that many ofthe CIL participants had eitherkey management or key Boardmembers that perceived entre-preneurship as an opportunity.But few CILs had both team

groups with a consistent vision.These differences stimulateddiscussion. However, the incon-sistency created obstacles thatdetracted from enthusiasm forentrepreneurial change.Ultimately, a written agreementof CIL management and CILBoard to pursue entrepreneur-ial activities became a keydeterminant in the criteria forthe project’s success.

The following summary is thestarting point for a CIL interest-ed in creating a wider base ofsupport for combining for-profitactivities. Discussions on theseand related topics may be foundthroughout this workbook.Abraham Lincoln is creditedwith properly stressing the needfor planning and preparation.When asked how he would dealwith cutting down a very largetree that was estimated to takesix hours, Mr. Lincoln statedthat first, he would spend fivehours sharpening his axe. Wehope you will sharpen your mis-sion and plan for profits.

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STRATEGIC PLANNING ANDFOR-PROFIT VENTURES – IS IT FOR YOUR CIL?

Each discussion is meant tofocus on an actual venture. Thatventure may come from a vari-ety of sources, such as CILmanagement, the Board ofDirectors, community needs ora single staff member. Thefocus should be on the stake-holder commitment and analy-sis of a specific definable ven-ture. The actual selection of theventure is less important thanthe understanding of the impactthe venture will have on the CIL:what risks are associated with aventure and how the decisionmakers view the resultingchanges to the CIL. The positionof the CIL’s key stakeholderswill be made clear through thecommitment process. Revisionsto the proposed venture may beincluded over time to deal withspecific concerns.

Exercise: Take a few minutesand look at your CIL’s MissionStatement. Discuss whether theMission Statement encourages oreven allows you to be entrepre-neurial. If not, decide what revi-

sions are necessary to have anentrepreneurial activity conformto the Mission Statement andprepare those revisions for for-mal adoption by the Board ofDirectors.

The feasibility of the venture istied to the motivation for thedecision. For a CIL, motivationsrange from cost containment toprofit incentives to support themission, to combinations ofmission support, added servic-es, to cost containment. (Costcontainment is the reduction ofCIL expenses, allowing savingsto be reprogrammed).

An example of cost containmentwould be: a CIL purchasing thebuilding where the CIL is rent-ing space. Rising rental costsincrease the total CIL operatingexpenses. The entrepreneurialoption might be to purchase thebuilding, helping to fix or stabi-lize these rental costs through amortgaged purchase. An addedbenefit would be the potentialincome of subletting unusedbuilding space to other organi-zations or small businesses.



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Exercise: Can you list the advan-tages of owning the building aswell as the risks of ownership?Where do you think the greatestobstacles would come from ifyour CIL tried to buy its building?Note: This situation will bereviewed in a case study later inthis workbook.

The ideal CIL for-profit venturemight be one that supports themission of the CIL, while con-tributing to the services orneeds of the CIL consumercommunity. CIL consumers relyupon goods and services fromthe business community.Occasionally, required con-sumer goods or services are notreadily available, or not avail-able at an acceptable cost,means of delivery orproduct/service feature. Thisnon-availability represents anopportunity for the CIL torespond to that need through abusiness venture.

By owning the business venture,a CIL determines the price (maychoose to limit profits in favor ofresponding to social needs) andimproves access to goods or

services. For-profit ventureshave incentives through taxesand accounting practices thatmay financially reward the CIL.These incentives are discussedin greater detail in the financialsection and tax appendix of thisworkbook.

The business plan is the start-ing point for most successfulbusiness ventures. Failing toplan for the success of the busi-ness is to plan to fail. Any CILthat is thinking about starting afor-profit venture is, by defini-tion, an innovator and undertak-ing additional risk. The businessplan is critical to controlling thelevel of risk associated with astart-up business venture.

Reference – see Case Study #3for some additional informationon risk tolerance in the CIL environment, assessment and the role of management and theBoard in the planning process.

The initial task for the entrepre-neurial CIL is to undertake anenvironmental review (political,financial, stakeholder and cus-tomer) of the influences that

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may impact the venture. Thepolitical review sensitizes theCIL’s planning group to the criti-cism of unfair competitioncharges by any existing busi-ness in the same sector or mar-ket area. This concern can bedealt with through careful defi-nition of the customer targetmarket and clear explanation ofCIL business objectives, asthose objectives relate to theCIL’s mission. The establish-ment of a for-profit venture alsodeals with the unfair competi-tion charge against not-for-profits by creating a level play-ing field (financially and throughtaxes) with businesses in theprivate sector.

Staying within the CIL’s missionand balancing the needs of theCIL service community helphandle stakeholder concernsand customer justification. It isimportant to confront early crit-icism with full disclosure of theCIL venture and deal with anyexpressed concerns beforecommitments are finalized. Thiswill reduce the political risksbefore your CIL has madeinvestments in the venture.

HOW TO INTEGRATE THE VENTURE INTO YOUR CIL MISSION

The entrepreneurial approachallows the CIL’s advocates toanticipate the changes that takeplace to be successful. Ventureideas always begin with a mar-ket analysis within the CIL geo-graphic area and the identifica-tion of unmet or partially metneeds, ideally where the CILmay have a competitive advan-tage. Being able to draw adirect link between fulfilling theCIL mission and the operationof a for-profit venture providesthe justification for the venturewithin the CIL. In trying to iden-tify a for-profit business to pur-sue, the fundamental objectiveof increasing CIL support bymaking a profit can be refinedby the objectives of the CIL andmeeting the overall CIL mission.

As the starting point, is recom-mended that CIL staff andBoard attend a brainstormingevent to solicit input. This eventshould be a facilitated, inclusivemeeting, starting with basicquestions about the CIL’s futureand encouraging open discus-



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sion. The following series ofstarter questions might be posedto stimulate the discussion:

• Is the CIL accomplishingeverything in its mission?Or, should more be done?

• Can the CIL expect regularincreases in support, atleast large enough to meetincreasing costs?

• What attributes of anentrepreneur do the staffand Board possess?

• Is there a historical background in the CIL orstakeholders that createsknowledge within a sectoror class of business?

• Why is a for-profit venturenecessary? (By answeringthis question, your primeobjective comes into focus.)

• Within the marketplace,what specific consumer orcommunity needs are notbeing met? If the CIL were tofulfill those needs, can it bedone at acceptable levels of:

- Price?- Service?- Perception?- Risk?

• The impact of earningmoney with a businessventure may impact thetraditional CIL supporters.How will the change in theCIL be perceived, and bywhom?

• What drives the selectedmarket for the businessventure? Are there goodsor services that the CILcan offer that better meetthe needs of the community,supporters, fundingsources, consumers andcustomers?

• Are there regulatory concerns? Does the CILpropose to meet:

- Safety standards?- Labor standards?- Wage rules?- Liability questions?

• What new and existingresources and assistanceproviders can be calledupon?

- Federal, State, public, traditional and innovative sources?

- Can the existing business community be supportive?

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- Other sources - governmental and private sector?

• Can the CIL’s targetedservice recipients be bene-fited by the venture?

• Does the CIL intend toremain in the business for-ever? Is an exit strategyappropriate so that a suc-cessful venture might besold off as an ongoingbusiness after the venturehas been established?

The business plan will recog-nize the objectives of the CILand anticipate the business lifecycle. Planning is actuallyorganizing change, which doesnot end with the successfullaunch and operation of thebusiness. The CIL real strategymay be to force improved oraccessible goods or servicesfrom the private sector bydemonstrating the need andviability, intending to divest thebusiness as soon as possibleand simply recoup any invest-ment. This is an exit strategy forthe business. Launching a ven-ture and planning to divest anongoing venture at a significant

profit can create a CIL reserveventure capital fund for the CIL’sfuture innovation.

Reference – See Case Study #1for additional information on inte-gration of the business idea withthe role, environment and mis-sion of the CIL and working to fitthe pieces together throughoutthe planning and implementationprocess.

Every business goes throughthe highest risk period of start-up, when the business conceptis still being proven. Sales arelow or non-existent; no rev-enues (cash) are being generat-ed to cover expenses. Unlessanticipated, this negative cash-flow situation causes tremen-dous concern among manage-ment. Detailed sales projectionsand careful attention to market-ing allows for early adjustmentsto the plan to attain targetedprojections.

As start-up proceeds success-fully, the business enters agrowth stage. Sales increase(dramatically or gradually) andmay cause similar cash flow



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problems as those experiencedduring start-up, but for very dif-ferent reasons. During growth,increasing sales require addi-tional working capital to fundsupplies and added expenses,(e.g. the timing delays of billingand collections, work inprogress, etc.). Although profits,on paper at least, are growing,the cash requirements of thebusiness may continue tonecessitate that funds areinvested in the business. Short-term borrowing is oftenrequired. As the business pro-ceeds through the growth stage,the short-term borrowingrequirements may not lessen.Ongoing growth may requireexpansion, where additionalterm borrowing matches the lifeof the expansion. Following thegrowth stage, businesses entera mature phase.

The mature business is markedby very predictable sales withonly slight growth correspon-ding to inflation or marketshare growth. During this peri-od, cash flow (income afterexpenses plus non-cash expen-ditures) significantly outpacescash expenditures and the high-

est level of surplus cash isachieved. This is usually theperiod of highest value for theventure. It may be planned totrigger an exit strategy to sellthe business at its ongoing ven-ture value, often significantlymore than the fair market valueof assets. By revising the busi-ness operation, the period oftime associated with the maturestage can be lengthened to gen-erate larger profits for extendedperiods.

Finally, businesses enter thedecline stage, where sales tendto lag behind inflation or actual-ly decline. And managementtends to cut expenses andinvestment as the only way tomaintain cash-flow margins. Atthis point, either the businesswill necessarily evolve toward anew market or cease opera-tions. The photographic industryis going through the declinestage brought on by digitaltechnology. Technological obso-lescence has become anincreasing threat to many busi-nesses in every sector. Thistechnology risk is anotherthreat that is often overlookedby smaller businesses.

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At each stage, the business planprovides the blueprint or yard-stick by which managementevaluates progress. Early identi-fication of problems can bemade to allow for correctiveaction before the situationbecomes critical. If the businessis off-track, what should bedone? The question to ask iswhether the business is aheador behind projections.Obviously, the response varieswidely. But either condition canspell disaster. It is advisable toanticipate how external eventswill impact your business. For a CIL, public sector fundingchanges have an impact onevery program. In the businesssector, external forces can disrupt the business operationeven more. Anticipating the disruptions allows for planningthat responds to, and furtherreduces, the risk.

The entrepreneurial CIL shouldbuild a consensus amongstakeholders and focus thebusiness planning on an actualbusiness and the resources,commitments and risks associ-ated. The following chapterswill help to introduce key fac-tors involved in the planningprocess that every CIL shouldconsider. It is hoped that thereader will use this informationto successfully analyze the decisions necessary to beentrepreneurial as a CIL.

Reference – See Case Study #4 for additional information oncoordinating the business ideawith the role and resources of theCIL and doing so in the context of a quantified look at the marketplace.



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Exercise: One early step that can prove helpful is to see your (or yourCIL’s) profile as an entrepreneur and small businessperson. The follow-ing exercise was developed by the US Small Business Administration to help gauge an individual’s entrepreneurial strengths. Working withyour Board and management, think about why you would like to start abusiness and what traits you can identify that you think will help you tobe successful in business? Remember this is simply a tool. It is fun totake and fun to interpret, but keep it in perspective.

For each question, circle the Yes, Maybe or No answer that bestdescribes you and/or your CIL. You must answer ALL questions forthe test to be accurate.

Y M N I am persistent.

Y M N When I'm interested in a project, I need less sleep.

Y M N When there's something I want, I keep my goal clearly in mind.

Y M N I examine mistakes and I learn from them.

Y M N I keep New Year's resolutions.

Y M N I have a strong personal need to succeed.

Y M N I have new and different ideas.

Y M N I am adaptable.

Y M N I am curious.

Y M N I am intuitive.

Y M N If something can't be done, I find a way.

Y M N I see problems as challenges.

Y M N I take chances.

Y M N I'll gamble on a good idea, even if it isn't a sure thing.

Y M N To learn something new, I explore unfamiliar subjects.

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Y M N I can recover from emotional setbacks.

Y M N I feel sure of myself.

Y M N I'm a positive person.

Y M N I experiment with new ways to do things.

Y M N I'm willing to undergo sacrifices to gain possible long-term rewards.

Y M N I usually do things my own way.

Y M N I tend to rebel against authority.

Y M N I often enjoy being alone.

Y M N I like to be in control.

Y M N I have a reputation for being stubborn.

Count all of your Y answers and multiply time 3. Count your Manswers and multiply times 2. Add the two numbers together foryour score.

If you scored between 60 and 75, start that business plan – you havethe earmarks of an entrepreneur. If you scored between 48 and 59,you have potential but need to push somewhat. You may want toimprove some skills in weaker areas. This can be accomplished byhiring someone with these skills. If you scored between 37 and 47,you may not want to start a business alone. Look for a businesspartner who can compliment you in the areas where you need somehelp. If you scored below 37, entrepreneurship may not be for you.You will probably be happier and more successful working for some-one else. However, only you can make that decision.

Remember, this is only an exercise based on characteristics foundin many entrepreneurs. It is by no means fool proof, but it should befun and a good starting point as you evaluate your feelings aboutpursuing a business idea.


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TAX CONSIDERATIONS: AN OVERVIEW

Note: This material is not to bedeemed wholly comprehensive or authoritative. The reader isadvised to consult with appropri-ate legal and tax counsel beforepursuing a particular course ofaction.

This section helps the entrepre-neurial CIL gain an understand-ing of the tax regulatory envi-ronment in which they are plan-ning a for-profit venture. Thissection covers broad issues oftaxation, structure, and conflictsor opportunities when the not-for-profit develops for-profitventures. It is intended to pro-vide awareness of areas inwhich CILs may need to do fur-ther research, to provide ques-tions that should be asked ingoing forward, and, to helpunderstand the implications andsignificance of a for-profit ven-ture in a non-profit environment.

Additionally, this section isintended to demonstrate thecomplex nature of the issuesand the importance of seekingqualified professional advice. Itis important to note that many

topics of taxation and account-ing in for-profit and not-for-profit ventures are subject tointerpretation and may varyfrom situation to situation. Wecannot state strongly enoughthe importance of professionaladvice.

Listed below are summaryareas and questions of generalconcern and interest to a non-profit looking at a for-profit ven-ture. Please refer to Appendix Afor more detailed informationand reference sources.

BASIC BUSINESS CONSIDERATIONS

A CIL evaluating a for-profitbusiness is searching for anopportunity that promotes theCIL’s primary mission byenhancing resources, servicesor access for its consumers. Wemust remain mindful that a CILis in an environment that placesmission fulfillment above finan-cial benefit and that a for-profitventure may conflict with thisnon-profit mission. It is impor-tant to review what the implica-tions may be for the organiza-tion with the Board, stakehold-

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ers, supporters and staff andassess preparedness to dealwith these challenges.

Many not-for-profit organiza-tions have learned that self-reliance is a means of long-term survival, especially asmore organizations compete forlimited public funding. Toremain in sync with their pri-mary mission, some not-for-profits have developed assetsand skills that are both mis-sion-related and valuable in themarketplace. Other not-for-profits have chosen unrelatedventures for more purely com-mercial opportunities, opting topursue the mission throughenhanced resources. It isimportant to structure whichev-er for-profit opportunity is cho-sen in such a way as to notinterfere with the not-for-profitstatus of the CIL.

Throughout the evaluation andplanning process, a major con-sideration to keep in mind isthat the rules at the federal andstate level that demand strictadherence to primary organiza-tional purpose over personalenrichment. This requires aclear separation between for-

profit and not-for-profit activi-ties. The separation must bereal and the activities on bothfronts must be reasonable intheir respective context.

The CIL should consider thereporting, filing and disclosurerequirements of the non-profitentity because these may com-plicate the ability to maintainconfidentiality of trade secrets,know-how and similar competi-tive information. Clear separa-tion of activities and roles canminimize this challenge.

CILs should be aware that dis-closure of information couldlead to incorrect public percep-tions, which may raise addition-al questions. For example, "Was‘public’ money used to begin thefor-profit venture?" Is the publicbenefit entity ‘competing’ withprivate sector suppliers with theassistance of tax dollars?"

Exercise: Set a meeting with key leaders of your CIL to discussaccess to qualified professionalassistance, the for-profit oppor-tunity in terms of community per-ception, which will the for-profitbe competing with, and, develop a list of the short- and long-term



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pros and cons to determine howthe benefits will outweigh therisks.

TAX CONSIDERATIONS

The following section identifiessome of the basic conceptsneeded to frame your questionsabout the tax-related restric-tions and examples appropriatefor CILs. These items are cov-ered in greater detail in IRSPublication 598 which also cov-ers he Unrelated BusinessIncome Tax (UBIT).

PROHIBITION AGAINST PRIVATE INUREMENT (PERSONAL BENEFIT):

The prohibition against privateinurement means that the per-son(s) who created or control atax-exempt organization,including its members, employ-ees, and other insiders, may notacquire any of its funds orassets, except when:

• They are paid "reasonablecompensation," or relatedexpenses, for services rendered; or

• They pay an amount equalto the "fair market value"of any of the organization’sassets they may receive.

LOBBYING ACTIVITIES

A for-profit organization mayexpend significant resourceslobbying various levels of gov-ernment to achieve preferences.Unfortunately, the not-for-profitis governed by IRC Sec. 501 (c)(3) which prohibits lobbyingactivities and can result in theimposition of an excise tax ifnot-for-profit funds are expend-ed for lobbying purposes.During planning, ascertain iflobbying or advocacy by the CILwill be an essential componentof your for-profit success.

Not-for-profit organizations areallowed to provide educationalinformation and respond to gov-ernmental inquiries without vio-lating the law. If CIL manage-ment has questions in this area,they are encouraged to seekclarification from legal counsel.Serious violations can result inloss of the CIL’s 501(c) (3) tax-exempt status, termination ofcertain officers or directors, ora variety of other sanctions.

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QUID PRO QUO CONTRIBUTIONS

In business, there are limita-tions on business-relatedexpenses, such as meals andentertainment expenditures,sporting events and other formsof market or client develop-ment. The for-profit can spendlarger sums of money treatinggifts as taxable income to therecipient, and adding the grossamount of the benefit(s) to taxwithholdings. However, there isno requirement of public disclo-sure. A CIL may entertain bene-factors, but there are con-straints dealing with excessiveentertainment and mandatorydisclosures.

A business can only deductactual gifts in under $25 unlessthe recipient reports the excessas taxable income, but there isno public disclosure.Conversely, a CIL must disclosethe value of any benefits, otherthan incidentals, which arereceived by contributors inexchange for donations. This isan example where scrutiny anddisclosure requirements arehigher for the CIL and may

adversely impact businessopportunities, while furtheringthe need for accurate CILrecord keeping.

UNRELATED BUSINESSINCOME TAX (UBIT)

UBIT is applicable to a non-profit entity that has earnedincome unrelated to its primarypurpose. IRC Sec. 513 (a)defines an unrelated trade orbusiness as any trade or busi-ness not substantially related tothe exercise or performance ofthe organization’s exempt sta-tus. When a CIL has an incomeopportunity, it may not auto-matically need to set up a for-profit organization. When a newbusiness develops, it may besmall enough to handle withinthe CIL without serious tax-related consequences to thenot-for-profit structure. Thismight correspond to the earlystages of a business ventureand provide a try and see win-dow for exploring a businessopportunity. This is an area ofwide interpretation and profes-sional advice should be securedbefore proceeding. Additionally,the IRS website at



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http://www.irs.ustreas.gov/businfo/eo/unrel.html offers somediscussion on the definition anddetermination of the UBIT.

The concept of UBIT should notbe automatically viewed as animpossible hurdle for the CIL,which is seeking to protect itstax-exempt status and enhanceeconomic viability. However, theofficers and board membersshould be cognizant of thepotential problems and addressthe issues as part of the overallbusiness plan.

BUSINESS STRUCTURE AND LEGAL FORM

Based upon these decision-making tools, the CIL mustdetermine the most favorablelegal structure in which to growand manage the for-profit business.

Typically, a CIL could start abusiness as the equivalent of asole-proprietorship if the devel-opment of a profitable conceptarises from the normal activi-ties and services provided bythe CIL. This approach does notoffer the goal of having the

for-profit business operating as a separate legal entity. As asole proprietorship, the CIL isexposed to all of the risks andtax implications associated withthe new business. While con-venient, this approach is notgenerally recommendedbecause of the risk to the CIL.

One of the significant elementsof selecting a business struc-ture is risk management.Though many of the specificrisks of the new activity can beaddressed by proper insurancecoverage, the development ofmanagerial controls, systems,and accounting can addressoperational exposure areas. Inmany cases, it is advisable forthe new business to be segre-gated from the CIL for legal lia-bility. This can be done througha limited liability company(LLC), which limits the riskexposure of the CIL. This willnot protect the CIL from tax andUBIT rules, private inurementor general disclosure. It doesprovide a ‘corporate-like’ pro-tection.

There are several forms of busi-ness that may make sense inany situation. This is an area

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that requires professionaladvice to assure the correctchoice.

THE CIL "CONTROLLING" A NOT-FOR-PROFIT (NFP)

If the business is an acceptableactivity, the CIL may isolate theactivity within another newlyformed entity within the lead orparent not-for-profit, providingoversight through an element ofcommon leadership. However,the Boards of Directors shouldnot be identical, nor should thesenior management.

Exercise: Spend some time withthe current leadership of the CILto discuss and identify skills andtalents among existing leadershipthat may be useful to a for-profitentity. Seek to identify key man-agers and board members thatmay be sought to augment one or the other (but not both).

Reference – See Case Study #1for additional information on howthe skills and resource base thatis currently available can providea good jumping-off point for thebusiness idea.

THE CIL WITH A FOR-PROFIT C-CORPORATION SUBSIDIARY

In situations where a CIL ownsa controlling interest in a for-profit corporation, care shouldbe taken during start-up thatthe for-profit is not simply analter ego of the CIL, and shouldbe combined for the purpose ofdetermining the entity’s tax-exempt status. Barring fraudu-lent or sham transactions,where the parent is not involvedin day-to-day activities of thefor-profit, or where the officersand Boards of Directors are notidentical, the IRS will respectthe separate identities.

It is important to have good sys-tems in place to properly allo-cate joint costs, such as in ashared space facility, or to havean appropriate interest rate setfor loans from the parent to thefor-profit subsidiary, or to setpricing or rates (like rent) at fairmarket values.

Exercise: Many CILs administergrants and similar incomestreams with fairly complexaccounting systems in place.Meet with your internal andexternal accounting professionals



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to determine if the existing sys-tems can handle the requisiteseparation. Determine any new or enhanced accounting softwareor systems that may be requiredto meet IRS regulations.

THE CIL WITH AN S-CORPORATION SUBSIDIARY

A CIL may elect to utilize an S-corporation as the for-profitentity. Though generally seen as a bad idea (earnings of theS-Corporation, which are attrib-utable to a tax-exempt organi-zation, are automatically treatedas UBIT income), you shouldconsult professional advisorsbefore making this determina-tion.

THE CIL AS A PARTNER IN APARTNERSHIP (INCLUDINGLIMITED PARTNERSHIPS)

The IRS takes a negative posi-tion on partnerships where anot-for-profit is a significant ormanaging partner. One keyexception occurs in cases wherethe not-for-profit’s role wasstrictly passive and not contrary

to the not-for-profit’s primaryobjective, as might be the casein an arms-length investmentpartnership.

FINANCIAL STATEMENT ANDDISCLOSURE CONSIDERATIONS

The American Institute ofCertified Public Accountants(AICPA), the FinancialAccounting Standards Board(FASB) as well as several othersources promulgate the rulesby which books and records arekept. When a CIL reports infor-mation in financial statements,the information must meet cer-tain standards to be useful toreaders and meet regulatoryrequirements.

A CIL involved in a for-profitactivity needs to understand therequirements and limits of dis-closure and reporting in orderto present accurate informationand proper disclosure while notdivulging trade secret informa-tion, such as marketing or pro-duction costs. Professionaladvice is a key element of yourdecision making process.

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THE BUSINESS PLAN: THECIL’S PRIMARY BUSINESS COMMUNICATION

The CIL must develop thestrategic business plan – theroad map for the business. CILstakeholders should be assistedin evaluating the business ideaor concept, asked to define cus-tomer characteristics, help for-mulate a marketing strategy,evaluate operations and beginto project basic financial andperformance data for the ven-ture. The process of goingthrough these steps is impor-tant for the successful launch ofa business, and it may be theonly way for a CIL to ensure keystakeholder buy-in as supportof the business.

WHY DOES A CIL NEED ASTRATEGIC BUSINESS PLAN?

A good business plan encour-ages research that allow theCIL to draw conclusions andplan in response to those con-clusions, helping fix mistakesbefore they happen to the busi-ness. It helps to identify thestrategies and implementationtactics that are most likely tosucceed in the CIL’s venture,

select products, services andmarkets that can be accessedand supported, and gives allmembers of the organizationthe information necessary tomove toward a common goaland success. If a CIL stakehold-er wants to advance the missionof the CIL through a businesssubsidiary, the CIL must be pre-pared to manage and organize abusiness effectively. The busi-ness plan is the best way todevelop the venture at reducedacceptable risk, set targetedgoals and measure progress.

A good strategic business planfocuses on markets for a prod-uct or service, anticipates futureneeds, monitors progress and isproactive - not reactive - inmanaging resources.

A good strategic business planprovides a valuable manage-ment tool which integrates allfacets of the operation -whether profit or non-profit.

A good strategic business plandefines where you are, antici-pates where you are going, andhow you are going to get there,encouraging everyone in theorganization to work together.



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Reference – See Case Study #1for additional information on howthe CIL anticipated the impact ofspace availability on the futurebusiness operation – and plannedthe solution!

If you have never prepared abusiness plan before, this work-book will help you. The ques-tions, outlines, exercises andsamples presented cover how togather information and assem-ble the plan.

The next step is to share thedata across the organizationand focus upon the outcomesneeded or desired. The processof planning allows key CILstakeholders to analyze thestrengths and weaknesses ofthe business idea, identify mar-ket opportunities, anticipatemarket changes and detail theactions required to reach goals,while allowing the CIL to drawon the expertise and strengthsof stakeholders through a par-ticipatory process of knowl-edgeable buy-in.

The first step to a good plan isto develop a Summary. This

short, one page document,takes the broad view of theissues and invites contributionsfrom all levels of the CIL. Bysimplifying the planningprocess, it enables the team toquickly make an assessment ofthe business concept.

Exercise: Develop a simpledescription of the business ideaand key outcomes. For example,the CIL wants to purchase thebuilding currently being rented.

The purposes are to:

a) Reduce cash outlay currentlyused for rent through offset withrental revenue,

b) Create an equity resource toimprove long-term financial sta-bility of the CIL, and,

c) Provide a more flexible realestate environment that will allowfor programmatic expansionand/or contraction in response toclient needs and business activity.

Then, review this statement withkey leaders of the CIL, as thisstatement will essentiallybecome the overall strategy andgoal statement of the project.

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The next step is to develop thedetails, incorporating feedbackfrom the more extensive plan.The plan is eventually going tobe a complete statement of thebusiness operation and almostlook like a book. Each chapterof the book is a specific plan initself - the marketing plan,sales plan, finance plan, opera-tions plan, and the underlyingdata to support each strategy,tactic and business action.

STRATEGIC BUSINESS PLAN –EXECUTIVE SUMMARY

The one page ExecutiveSummary is an overview of thebusiness. It is a brief descrip-tion that sets the vision, theimplementation and the out-come into one easy to under-stand statement. After readingthe Executive Summary, thereader should understand whatthe CIL wants to do, how theCIL will do it and how the CILwill define success.

While the Executive Summarycan be written last (after com-pleting the nine key areas iden-tified below and after complet-ing the financial projections), it

is preferable earlier in theprocess. The summary high-lights the key ideas of the plan,the measurement of success,competitive advantages andlinks all of the facets of the ideato help the reader understandthe plan without significantexplanation from individualsassociated with the CIL.Approach the Summary as astatement of the business, iden-tify issues or opportunities, andtry NOT to spend more than anhour writing them down. Thisinitial Summary is only meantto communicate the preliminaryvision. The details will beworked out over time.

Take action, share the Summarywith key CIL stakeholders, andinvite their reaction and involve-ment in the Business PlanDevelopment Team (or whatevercatch phrase you prefer). Ifstakeholders do not respond,reach out to them and press fora response. Remember that anegative response early is muchbetter than later on, after theTeam has committed resourcesto the detailed plan. This earlybuy-in through participation ispresented as critical to CIL suc-cess in entrepreneurial activities.



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Exercise: After you have com-pleted the preliminary work oneach section, try to summarizeeach section in one or two sen-tences. Establish the flowbetween sentences or strategies,demonstrating the connections.Try to establish the overall logicand reason of the plan. For example:

"The CIL will establish a whollyowned subsidiary LLC to pur-chase the 30,000 square footbuilding housing 12,000 squarefeet of CIL offices and programspace. The key objectives of thiseffort will be to reduce rentalcost, build equity and increasefacility flexibility."

"There is strong demand fromarea professional services firmsfor small offices with parking andtransit access. We plan to provideconventional rentals and ‘sharedservices’ space, utilizing existingCIL office systems such as voiceand data communications. Thereis a shortage of this type of spaceand service offering in the areawith most facilities showing bet-ter than 95% occupancy."

"Marketing and sales will be han-dled by a new Facilities Manager.

We will develop market aware-ness through close contacts withour stakeholder community andsmall firms offering services toour client base, which is currentlymore than 35 service providers inthe legal, therapeutic and supplysectors. As a single facility, thenew Facility Manager will overseeday-to-day operations includingbuild-out, usage, utility billing,signage, etc. The new positionwill report to the CIL ExecutiveDirector, to the CIL FinanceDirector for fiscal oversight andto the CIL Board for periodicreporting."

"The purchase price of the build-ing is $1,250,000, and an addi-tional $250,000 for first yearoperations and build-out of rentalspace, for a total of $1,500,000.Key factors in our financial planare a $125,000 cash contribution,15 year commercial financing at6%, rental charges at $12 perfoot (the current local marketsupports $13-$15/foot) and a75% first year occupancy of the18,000 square feet we do not nowoccupy. This will produce rentalrevenues of $13,000 per month inthe first year, and, at 85% occu-pancy in the second year produc-

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ing slightly over $15,000 permonth. Allowing for an $11,600monthly mortgage payment andoperating costs of $5,000 permonth, we should close the yearat a net monthly cash loss of lessthan $2,000 – an $8,000 improve-ment over our current rentalexpense. When we achieve 90%occupancy in year 3, we moveinto a positive monthly cash flowof $1,500. In addition, we will besaving $120,000 in annual rentalexpense."

"This plan details the resources,usage and integration of the pur-chase of the building, the impacton cash flow and the benefits toour CIL. Essentially, this plantakes our CIL from an annualexpense of $120,000 to an annualgain of $138,000. This is a signifi-cant resource improvement thatwill be used to further the mis-sion of the CIL and the services to consumers."

BUSINESS DESCRIPTION

The Business Description is a short statement of what thebusiness is and what it does. In a concise manner, describethe business.

Example: The CIL Real EstateLLC is a corporation establishedto acquire and operate the officebuilding at 123 Main St.,Smithville, NY. Up to 40% of thefacility will be occupied by theCIL, up to 25% will be structured,rented and operated as a ‘sharedservices’ office facility offeringvoice, data and systems accessfor tenants, and, the remaining35% will be structured as rentaloffice space targeted to profes-sional service firms with marketinterests among the client baseof the CIL. The overall aim of theReal Estate LLC is to reduce theoperating expense of the CIL,build long-term equity and sup-port the services of the CILthrough contribution of profit andexpense reduction.

MARKET ANALYSIS

The Market Analysis describeswho the customers are. Howmany customers are out there?What are the characteristics interms of size/age, location orcommon traits? How can theybe identified (e.g., by industry,by size, etc.)? Is the product orservice available from othersources? How big is the mar-



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ket? How much is spent by cus-tomers? What are the past, cur-rent and future market trends?Is the market segmented (bro-ken down by characteristics likecolor or material)? Is the mar-ket a commodity (everything isseen as the same)? Is it cus-tomized and unique? What isthe geographic area of the mar-ket? What part of the entiremarket will the business target?

1) Market Size - Present figuresand factual information on thesize of the market for yourproduct or service. Obtainingnumbers may seem difficult,but the effort will be worth it.Programs like the SmallBusiness Development Centercan help you find sources ofinformation and, in some cases,conduct original marketresearch. Be sure to includeinformation on the following:

a) How much is being spent onthe product or service (by allcustomers)? Or, if the product isnew, how much is being spent onalternative products or services?

b) Is the market expanding orcontracting? At what rate?

c) How is the market changing?Define the characteristics thatare changing?

d) Where will the market be infive years? How much will cus-tomers be spending? Will popu-lation or age projections showan impact on the future of themarket?

2) Market Profile - Describe theexisting or potential customersfor your product or service.Expand on the information inthe Business Description sec-tion. This expanded detailshould include:

a) Who will buy? If customersare individuals, what are theircharacteristics such as; age,income level, education, familystatus, etc. (customer demo-graphics)? How many cus-tomers are there? If customersare businesses, what kind ofbusinesses? What do they havein common? What size(s) arethey? Are products branded orprivate label, etc?

b) Where are customers? Arethey located in a particularregion or area? Describe thecharacteristics of the region as

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it may relate to your products,e.g., if your business makeswinter coats, your customersare principally in colder regions.

c) Why will the product or serv-ice be purchased? Expand onthe customer need that theproduct or service meets andwhy the customer will selectyour product over a competitivechoice. Will your product bettermeet a feature or benefit need?For example, with athleticfootwear, Velcro brand closuresare a feature. But if the sneak-ers make you jump higher andrun faster, that is a benefit. Theperception of a benefit can beas important in the marketplaceas an actual benefit.

d) When will the product orservice be purchased? Is it sea-sonal and, if so, what is the sea-sonal aspect? Does it tie in withother products or events? Isthere a limited timeframe forthe product?

e) What is the customer expec-tation for the product or servicein terms of price, quality, serv-ice, delivery, packaging, etc.?

Reference – See Case Studies#1 and #2 for additional informa-tion on how the market data wasdeveloped, how additional costeffective resources were broughtin and how the data are used tosupport the decisions in theBusiness Plan.

Exercise: Review some numbersfor the potential customers ofyour product or service. Remember,this is the time to be as quantita-tive as possible.

Smithville, NY, has seen robustgrowth in recent years in demandfor office space. According to theReal Estate Reference Co. annualsummary of office space statis-tics, Smithville has grown from650,000 square feet of primeoffice space to more than1,000,000 square feet over thelast 5 years. Rental rates havekept pace with this growth inavailable space, rising from anaverage of $9/sq. ft. to $14/sq. ft.over the same period. A signifi-cant component of this growthhas been in ‘shared services’ -space that is rented ready to use,equipped with phone systems,computer networks and datacommunications, access to



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conference rooms, a receptionarea and similar attributes. Thistype of space has been extremelypopular among professional serv-ices firms seeking access to larg-er facilities than might otherwisebe cost effective. Long-termgrowth prospects are attractive,with Ollie’s Office Space Monthlyquoting industry experts asexpecting 7% - 10% annualgrowth in this segment over thenext 10 years.

The market for small to mediumsized office space (1,500 – 3,500sq. ft.) has shown excellent sta-bility, with moderate growth overthe last 10 years in the Smithvillearea. The new number of leasesreported by Lisa’s Leasing Statshas shown consistent, moderategrowth, averaging 5% annually,over a 15 year period with fluctu-ations of less than 2 percentagepoints a year.

This space is frequently rented tolarger service providers in themedical, legal and technicalareas. According to statisticsfrom the NYS Dept of Labor, thenumber of service providers inthese segments continues togrow. It is anticipated that thisgrowth will continue on a long-

term basis. The growth shows adirect relationship to the aging ofthe population – a trend that theUS Dept of Commerce indicateswill be continuing for the next 33years. Given the natural linkbetween these medical providersand our client base, we will tar-get the 173 medical practices,with more than 3 physicians,located within 75 miles ofSmithville as our market of rentalcustomers. Add to this marketsize estimate the average 3 newsimilar medical practices beguneach year, and a sustainablemarket for space is projected.

PRODUCT OR SERVICE ANALYSIS

This is where you must presentevidence to prove (and to con-vince the reader) that there is aneed for the product or service– and that there is sufficientdemand to support the businessproposed. It is not enough to believe in the product orservice, it must be shown.This section must:

First, identify the need for the product or service,

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Second, show how the product or service meets thatneed, and

Third, show how to sell theproduct or service at a profit.

Exercise: Working with the keyproponents of the businessidea: Describe what the productor service is and why customerswill purchase it. What are thefeatures or benefits of the prod-uct or service that are betterthan the competition (e.g., bet-ter quality, cheaper, faster, andsofter)? What need does theproduct meet for customers?How does the product or servicesatisfy demand? Is the productprotected by a patent or otherexclusive contract? What makesthe product unique – is it brandedor private label?

COMPETITION

Identify the companies that pro-vide a similar or an alternativeproduct or service. Be sure notto overlook competition fromoutside the area. Describethese competitors in terms ofimportance, size, location, tar-

get market, distribution or othercharacteristics. This sectionworks well as a chart.

Remember: A good place tostart this research is the localyellow pages in the telephonedirectory and/or industry cata-logs. Describe all identifiablestrengths and weaknesses,such as competitor #1 has alarge dedicated sales force, #2has no local service site, etc. Donot forget to evaluate how thecompetition operates:

• What is done right andwhat is done wrong?

• What appears to be thecompetitor’s strategies inmarkets, sales and opera-tions?

• Is there a competitiveweakness that your busi-ness can improve upon andexploit?

• Is the market large enoughfor an additional businessor will an existing businessbe forced out of the market?

• Can a new business sur-vive long enough to effec-tively compete?



40

Describe the companies andproducts that are the competi-tion. Do not forget to includeimports if they are a factor inthe market. Remember, evennew products have some type ofcompetition. For example, if thebusiness will be selling cashregisters, a look at personalcomputers would be appropri-ate as competition as a similarpoint-of-sale data processingequipment.

Exercise: Work with the leadersand managers of the product toidentify the direct and indirectcompetition. Include the followingand limit detailed analysis to thetop 5 or 6 competitors:

How many companies will becompeting against the business?Where are the businesses locat-ed? How long have they been inbusiness? How does the competi-tion distribute the product orservice? What is the respectivemarket share? What are thestrengths and weaknesses inmarketing, operations andfinance, of competitors? And whatare their strategies? How doesyour product compare in terms of price, quality, service, design,delivery or other features? Do you

intend to take market share awayfrom the competition or will yoube creating a new, niche market?

Some of this information mayseem difficult to obtain, but getas much reliable data as possi-ble so you know the competi-tion. Start research with readilyavailable tools, like the tele-phone book yellow pages, cata-logues, sales literature, indus-trial and commercial directo-ries, libraries, trade associa-tions, etc. This section is oftenset up as a chart or table/matrixlisting the same categories foreach competitor and highlight-ing the weaknesses or missedopportunities.

MARKETING STRATEGY

This section describes how toreach customers and salesgoals. Think of why customerswill choose your business overthe competition. Identify anddescribe how to get sales by answering the followingquestions:

How will specific markets bereached through advertisingor promotion?

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How will you price the productor service?

How will the product or serv-ice be distributed?

For example, will sales bethrough retailers, by direct mail,sales representatives, regionaldistributors, and sales people?How will promotion be handled– a brochure or data sheet,radio/television, etc.? Whereand when will advertising takeplace? How much will be spenton advertising? Will you have a market niche that can be targeted at less cost? How will service policies affect marketing?

This is the section where youintegrate and assess the mar-ket, the competition, your capa-bilities and how to set the prod-uct or service apart from theothers. The following are impor-tant elements to consider whendeveloping the strategy: trendsin the market, competitivestrengths and weaknesses,voids in the market, marketniches, technology, lower costs(production or sale), advertising,public relations, promotions,quality, and service.

Reference – See Case Study #4for additional information on theimportance of looking beyondyour assumptions at additionalmarket areas using numericmodels and quantitative measures.

Be sure to address each of thefollowing areas:

Product Features - Review thefeatures of the product thatmeet the needs or demands ofthe marketplace. Discuss howthose needs are met. Describerelated features and design ele-ments such as: How the productwill be packaged in terms offunction and promotion. Doesthe package need to preserve,protect or display the product(or all three)? Is shipping a con-cern? Are there environmentalconcerns or concerns by theretailer or final seller of theproduct? How will the labelaffect the product?

In addition to promotional infor-mation, are there regulatoryconcerns for label content (e.g.,ingredient lists, nutritional data,warnings, directions, UPCcodes, UL listing, ISO 9000,etc.)? How will you register and



42

use trademarks and identifyingimages? Discuss the plan todevelop, establish and protectthe image. Remember: if it isunprotected and can be used byanybody entering the market.What is the investment worth?

Warranty terms are sometimesa critical purchasing decisionpoint. What will the warrantyterms be, why, and, what doesthe market expect? Service maybe another significant purchas-ing decision point. What will theservice policy be and how will itimpact the business?

Pricing - Price can be the keyelement in a marketing strategyand must be carefully thoughtout. Several price developmenttheories exist that may apply.Consider the following: How willthe price relate to the cost ofthe product? How will pricerelate to the cost of marketingand promotional efforts? Is dis-counting required in the mar-ketplace? How will the pricecompare to competitive prod-ucts? Is the difference worth it?How will the price relate towhat the market is able andwilling to pay? Products target-

ed for price sensitive or low-endmarkets cannot succeed at ahigh price. How will the pricingstrategy enable the objectives tobe achieved? How does pricerelate to the distributionmethodology? Is multi-tier pric-ing required? What will theimpact of retailer/distributormarkups be? Will these add-ons make the product tooexpensive?

Distribution - Describe howyour product gets from you tothe customer and how thatrelates to marketing methods.Consider the following: Whatare the available methods fordistribution (e.g., direct salesforce, distributors, retailers,mail order) for similar prod-ucts? What are the methodsused by your competition? Willyour method be different? Why?Can this differentiate your prod-uct? If you use a direct salesforce, how large will it be? Whatwill sales representative growthrate be? How will salespeoplebe compensated? And, whatexpenses will you incur beyondsalaries? If you use dealers ordistributors, how many do youneed? Where will they be? How

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will you determine these factors(e.g., geographically, demo-graphically, logistically)? Andhow will you hire them?Describe, in reasonable detail,how the distribution method willsupport your strategy and reachyour objectives.

Promotion - Describe how youwill generate awareness of yourproduct among potential cus-tomers. Include the following:What promotional activities areused by the competition (e.g.,advertising, publicity, literature,trade shows, etc.)? What activi-ties will you plan to use? Howand why will they differ from thecompetition? How much do youplan to spend on these activitiesas a total dollar amount and asa percentage of projected sales?How will your activities reachthe customer at a purchasedecision-making point? Howwill you maintain awareness foruneven sales decision cycles?How will you develop brand loy-alty? How will you scheduleactivities? What will your mediaor production schedule for liter-ature or advertising be to meetmarket requirements?

Exercise: Select one of the mar-keting areas above and, workingwith just the key managers of theproject, answer all of the ques-tions in one section. Review youranswers with an outside resourcelike the SBDC to begin developingfeedback and critical questioning.

OPERATIONS

How will you obtain or produceyour products or provide yourservice? At a minimum, consid-er the following:

Location & SpaceRequirements - Where is/willthe business be located andwhy? What type of space isneeded? How much space?What will it cost? What may beunique or special about thespace (e.g., a sophisticatedassembly operation may requireair conditioned manufacturingspace)? What is the breakdownof space by type (e.g., 20%office, 50% manufacturing, 30% warehouse)?

Regulatory - What is the regu-latory environment? Is the areayou want zoned for your type ofoperation? Are emissions or



44

discharges a concern? Doesparking or truck traffic count asa concern?

Equipment Requirements -What type of equipment isneeded for manufacturing orservices? How much does theequipment cost? Is specialoperator training necessary?Are special licenses required?How much will the equipmentcost to operate?

Personnel Requirements -Human resources are often themost important component toan organization. How many peo-ple do you need to operate?What skills do they need? Whatkind of experience is needed?Are the people available? Whatare the prevailing wages? Istraining required? Are unions afactor? Provide a roster of exist-ing operations personnel and aschedule of planned hires bydate of hiring and associatedexpense.

Production or ServiceOperations - Describe theprocess of manufacturing orproviding the service andinclude the advantages of yourprocess, capacity, quality con-

trol systems, potential suppli-ers, secondary sources for rawmaterials or subcontract servic-es. Try to breakdown fixed andvariable operating expenses,both current and projected.Variable expenses will changedue to the volume of sales.Describe the relationship ofcost to sales.

Exercise: Working with the keyproject managers, develop a briefsummary describing how you willmake or obtain your product, or,provide your service. Be specificin describing: how much space or special electrical service orspecial plumbing may be neededfor machinery, storage, packingand handling? What type ofmachinery is required? Howmuch warehouse and office spacedo you need? Are there any zon-ing or regulatory [OSHA, EPA,etc.] concerns? How manyemployees will you need, and,when will you need them? Arespecial skills required? Whatemployee training will berequired and how will trainingimpact operations? Describe thespecific process steps employed inmaking the product or providingthe service. Take your summary toan external resource for review.

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MANAGEMENT

How will your business be man-aged? Investors and lendersmust be convinced that you canmanage the business success-fully and can attract needed newstaff. Describe the following:

Organization - Explain how thecompany is organized with abrief description of the role ofeach manager and provide anorganizational chart or jobdescriptions. Job descriptionsshould include the specifictasks, responsibilities, authorityand relationships to otheremployees of each job.

Key Managers - Show how themanagement team has the nec-essary functional skills in pro-duction, marketing, finance, andgeneral management. Describetheir experience with your prod-uct in a related industry. Providea brief biography of managers,list past positions, accomplish-ments and career highlights.Include resumes in an appendixor as an exhibit.

Management Weakness -Identify any weakness in themanagement team and explainhow you will address the weak-

ness. Can critical missing skillsbe provided by recruitment,training or subcontracting?

Compensation - Describe thecompensation plan that will beused and how each managerwill be paid. Will there be abonus, profit sharing or otherincentive plan? If so, describethe incentives in detail. If theplan does not provide paymentfor management/ownership,that is a mistake that will affectthe credibility of the plan.

Ownership - What role will theparent CIL perform? Who willbe the point person for owner-ship? How will the for-profitventure interact with the not-for-profit CIL?

Board Membership - Identifywho will participate on the for-profit’s Board of Directors, whythey were selected, how eachone will help the business.

Exercise: Begin by listing whowill be active in the business.What experience is the staffbringing to the business? How dothe backgrounds of staff relate tothe business? Provide resumesor descriptions of the back-grounds of the people that will be



46

working with the venture. Identifysupport persons and services,such as accountants or attorneys.Outline job descriptions to identi-fy tasks and responsibilities necessary. How will uncoveredjob requirements be met?

FINANCES

In this section describe howmuch the business will cost. Ifthe venture is already operating,provide financial statements ortax returns for the last threeyears. How much business isbeing done? Is the businessmaking a profit? How much?

Reference - See Case Study #2for additional information on theimportance of understanding thefinancial implication of the busi-ness idea and its potential impacton existing CIL operations. Alsosee Case Study #3 for a goodunderstanding of the need to setperformance targets relateddirectly to the ‘cost of capital,’accessing that capital and providing measurable outcomesin the plan.

If a new venture, estimate howmuch it will cost to launch andoperate the business until

breakeven is reached. Forexample, the new machine willcost $3,000 plus $500 for instal-lation. Will the new machineryor equipment help you staycompetitive? Will you have acompetitive advantage? Identifyall the costs of your product.Can you make a profit?

Estimate the total operatingcosts in the business by review-ing: rent, wages, benefits,insurance, advertising, printing,telephone, utilities, travel, salesexpenses, etc. Set up samplefinancial schedules to help proj-ect three years of business. Ifthe business borrows money,include the proceeds of the loanand monthly repayment of prin-cipal and interest. As you devel-op the numbers, write down anyassumptions that are associatedwith each estimate.

Use the sales and cost informa-tion developed in preceding sec-tions to prepare projected finan-cial statements. Use a profes-sional to assist in developingthis information because itmust be formatted in a veryspecific manner and in compli-ance with FASB and GAAP. Besure to provide back up for theassumptions used in the projec-

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tions. Include the followingstatements: Source and Use ofProceeds/Funds, Cash FlowProjections, Income Statementsand Balance Sheets andStatement of Changes inWorking Capital.

Source and Use ofProceeds/Funds -

Whether the CIL, a lender orinvestor is funding the business,they need to know how muchmoney is necessary. Where willfunds come from? How will theybe paid back? And, how willfunds be used? For example, abusiness might need $25,000 inloans in phase one, (with a 7year term carrying a 12% inter-est rate) to be used for the pur-chase of two $10,000 pieces ofequipment and one $5,000 com-puter. A $30,000 loan in phasetwo (with a 5 year payout at pre-vailing rates 24 months later)will be used for two additionalpieces of equipment andimprovements to the facility($3,000) and worker training($7,000). The Source and Use ofProceeds statement is frequent-ly done as a table, identifyingthe major income items, the

major expense items (e.g.,machinery, computers, officeequipment, etc.).

Reference - See Case Study #2for some additional informationon the importance of directlyrelating the budget of the businessidea to the budget of the CIL.

Cash Flow Projection - Thisstatement identifies sources ofcash, categories for cash paidand operating expense cate-gories. This statement helpsmanage cash requirements inboth short and long term views.(A sample form is providedbelow.) Cash flow projectionsshould be monthly for the firstyear and at least quarterly forsubsequent years.

Income Statements andBalance Sheets - These state-ments are the standard meas-ure of how a business is per-forming. If already in business,provide statements for the lastthree years. Plans usually pro-vide quarterly projections forthree years, and annual projec-tions for years 4 and 5. If anaccountant prepares the infor-mation, provide audited or



48

reviewed statements. Theincome statement shows rev-enue, expenses and calculatesprofit or loss, an overview of theoperations of the business. Thebalance sheet identifies assetsand liabilities of the business ina snap shot, showing the busi-ness current status. (Sampleforms may be found below.)

Break-Even Analysis - Thisanalysis helps to understandthe specific relationshipsbetween costs and sales. Atwhat sales volume do profitsstart? At what volume do profitsdip due to incremental expens-es (such as new machinery,overtime, etc.)? Break-evenanalysis looks at the businessoperating levels and is a keyevaluation for the project.

Assumptions - For each line inthe pro-forma [projected per-formance] financial statements,indicate any assumptions uponwhich estimates are based. Forexample, if spending $10,000 ona new piece of productionequipment, have a quotationfrom the supplier or a copy of aprice list. Support raw materialprice estimates with quotations,support labor rates with pre-

vailing wage studies (availablein libraries) or union sum-maries. Assumptions may flowfrom earlier sections on objec-tives, marketing strategy, oper-ations, organization, manage-ment and timing. If the plancalls for ten salespeople, reflectthe salary costs assumed.Assumptions are among themost likely areas for challengesto the business plan. Test theassumptions and be confidentin the ones presented.

Spread Sheets - Computerspreadsheets are very useful foranswering ‘what if’ questionsand looking at results under dif-ferent assumptions, conditionsor scenarios. An SBDC advisorcan run the numbers throughcomputer models to give a bet-ter feel for the dynamics andinterrelationships of the busi-ness. This will create a betterunderstanding to manage thebusiness and respond to ques-tions from lenders or investors.

SUPPORTING INFORMATION

Provide copies of brochures,photos, news clippings or otherrelevant information that willhelp others better understand

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the proposal. For example, aphotograph helps someoneunderstand the product. A copyof a competitor's brochureshows how your product com-pares. If the business is a fran-chise, attach a copy of the fran-chise contract, etc. Provide anyinformation that clearly displaysyour knowledge of the businessand the competition. Keep allmaterials clear and concise.

TIMING

Prepare a schedule that reflectsmajor milestones in the busi-ness plan for the next fiveyears. This can be effectivelypresented using a chart andbrief explanations. Addressmajor or significant goals andextend the list to a monthlyoperating schedule. Be sure tolist planned product introduc-tions, changes in workforce ormanagement, noteworthy salesevents (e.g., trade shows, sell-ing seasons, tie-in promotions),changes in facilities, significantchanges or events in the mar-keting strategy or the market-place (e.g., pending regulatorychanges) and significantchanges to the customer base.

EXHIBITS/APPENDICES

Exhibits and appendices providesupportive details for the plan.Include resumes of all key per-sonnel and managers. Jobdescriptions for other person-nel, brochures to explain prod-ucts or services, maps showingthe location of the business,prior tax returns, prior financialstatements, accountant’sreports and quotations or sup-porting assumptions for thefinancial section, competitivesales literature and demo-graphic tables support the mar-keting section, copies of patentsor similar documentation, flowcharts for production, and, anyother supporting or explanatoryinformation that can be refer-enced by readers of the plan.

WRAPPING UP THE BUSINESS PLAN

Working from the informationdeveloped, you are ready toassemble the Business Plan forthe new venture. Include theTitle Page – name, address,phone and contact information.You would be surprised to seehow many great plans do not



50

give the reader any way to con-tact the author.

Organize the plan as a collec-tion of individual chapters. Thechapters are drawn togetherand integrated by senior man-agement in the ExecutiveSummary to show the fit, rele-vance and operability of eachsection. Remember to include aTable of Contents and any otherassistive tools that improvereadability but do not compli-cate the plan.

SUMMARY

The business plan will be readby many individuals: from theBoard of Directors to fundingagencies to banks and evencustomers and employees. TheSummary lays out the funda-mental keys to your CIL’s suc-cess and convinces the readerthat this is a viable businessidea that they should support.The business plan is the salescatalog for the business, gettingall parties focused on the sameways to reach success. The Sum-mary must present the plan in away that is logical and makes

the reader want to continue.

Keep in mind that the Summaryappears first. But you write itlast - after the plan is complet-ed. It should not be longer thantwo pages, and should include:

• A brief description • Market potential and com-

petitive assessment• Product advantages and

market need • Objectives for the business• Market strategies• How to make the product

or perform the service• Experience with the prod-

uct or service• Projected sales and profits• Financing needed• Where financing will come

from and how it will beused

• How the financing will berepaid, if required

Obviously, you must write veryconcisely. Give only the high-lights and refer to supportingdetail in the other sections ofthe plan.

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As ofCurrent Assets

CashAccounts Receivable

Inventories Prepaid ExpensesOther Current Assets

Total Current Assets

Fixed AssetsLandLeasehold improvementsEquipmentVehiclesOther fixed assets

Sub-total fixed assetsLess

Accum. depreciation

Total Fixed Assets

Total Assets

Current LiabilitiesAccounts payableCurrent portion LTDAccrued expensesOther current liabilities

Total Current Liabilities

LTD net of current

Owner’s EquityPaid-In capital

Retained earnings

Total Owner’s Equity

Total Liabilities & Equity

SAMPLE BALANCE SHEET


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SAMPLE INCOME/OPERATING STATEMENT

Gross SalesLess returns/allowancesNet Sales

Less Cost of Goods Sold

Gross Profit

Operating expensesAdvertisingBad debtsBank chargesCredit card feesDepreciationDues & subscriptionsInsuranceInterestMaintenance & RepairsPostage & SuppliesRentSalaries & WagesTaxesTelephoneTravel & EntertainmentUtilitiesOther operating costs

Total Espenses

Profit/(Loss) before taxes

Income Tax expense

Net profit/(loss)

Q1 Q2 Q3 Q4 Total

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SAMPLE CASH FLOWNote: The Cash Flow statement should be done monthly for the first yearand at least quarterley for all other years.

Cash on hand

Cash ReceiptsSalesCollection of credit acctsLoans or Financing

Total cash receipts

Cash paid outPurchasesGross wagesPayroll expenseSuppliesRepairs/maintenanceAdvertisingInsuranceInterestDelivery & travelAccounting & legalRentSalaries & wagesTaxesTelephoneCapital purchasesUtilitiesOther expenses

Loan principal payments

Total Cash Paid Out

Cash at end of month

Essential Operating DataSales volume $’sAccounts receivableBad debtsInventoryAccounts payable

Q1 Q2 Q3 Q4 Total


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THE CIL AND SBDC PARTNERSHIP IN ACTION

Social impact organizationshave traditionally operated withsignificant support from govern-ment funding programs.Consequently, as funding hasbecome erratic, CILs have beenforced to adapt cost cutting andrevenue generating programs.Because of these changes, cre-ating business models, market-ing plans, and developing entre-preneurial skills have become apriority. Most CIL staff recruit-ment has not identifiedintrapreneurs that recognizeand seize business opportuni-ties. Therefore, outsideresources and assistance areimperative to facilitate changesin the planning process.

In 2001, the NYSSBDC and theRehabilitation Research &Training Center on IndependentLiving Management (RRTC-ILM), a member of the WesternNew York Independent LivingProject, Inc. family of agencies,joined together to introduceentrepreneurial practices andprincipals to CILs around thenation. The relationshipbetween SBDCs and CILs estab-

lished training and businessassistance to those CILs inter-ested in developing for-profitventures. Entrepreneurialthinkers often have businessmodels in mind. So, the trainingevents provided CIL staff withthe fundamental tools to objec-tively analyze the feasibility ofeach potential venture.

Three CILs were chosen to fur-ther develop and structure aproposed for-profit entity, withintensive assistance from SBDCrepresentatives. In each case, aNYSSBDC staff coordinatorheaded each assistance team,combined with a local SBDCstaff member.

Successful outcomes for CILswere identified to include:

• Significant (for-profit)financial contributions tothe CIL

• Improved business opera-tional procedures

• Focused vision for the CILorganization and consumers

• Greater and improvedcommunity interaction

• More pro-active internalgovernance of the organi-zation

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• Greater public exposureand enhanced image forthe CIL program

• CIL management corecompetency growth toapply the private businessmodel to overall opera-tions

The initial business plan devel-opment projects selected werefrom Marshall, Minnesota,Lynchburg, Virginia, and Erie,Pennsylvania. In a second roundof selection, a project from Troy,New York was selected. Thesefour projects are summarized inthe following case studies atdifferent stages of development.(A fifth project, selected fordevelopment in the secondround, did not proceed beyondthe identification stage due to aconflict with the project mission).

CASE STUDY #1 – THE SOUTHWESTERN CENTERFOR INDEPENDENT LIVING(SWCIL) - MINNESOTA

This project was uniquebecause it created a profit busi-ness that reinforced the socialimpact of the CIL by providingwell-constructed and affordableresidential ramps for individuals

with disabilities. SWCIL collabo-rated with the MinnesotaDepartment of Corrections toServe Program to construct andinstall modules and ramps atminimal cost because individu-als paid only for the cost ofmaterials and a $250 setup fee.

A key component of the successof this project was the ability ofthe CIL Director and Board ofDirectors to recognize the needto develop a for-profit construc-tion business to fill the special-ized niche of access ramp con-struction at lowered cost. Thiscommitment led to the success-ful implementation of a thor-ough market analysis at theoutset of the project.

The marketing study revealedthat there was a strong unmetmarket demand with little com-petition (few contractors in thearea built ramps of quality) thatmet code requirements. Withthis market information in hand,the SBDC and CIL worked todevelop a marketing plan, feasi-bility analysis, business plan,human resource analysis, andpromotional strategy for thebusiness.



56

The following elements com-bined to achieve progress:

• The CIL Director commit-ted to the for-profit con-struction company.

• The CIL Board was 100%behind this effort.

• The CIL had knowledge ofthe construction industryand a passion for buildingramps and home adjust-ments for people with disabilities.

• The CIL’s former construc-tion site (where rampswere pre-assembled) wasat the Lyon County FairGrounds. It was a goodlocation, except when thefair was set up (two months).During those months, theCIL discontinued all con-struction activities.

• The CIL built a buildingoutside of town in anindustrial park. The build-ing has room for expansionand three work crews findthe space perfect. The CILdoes not lose this site dur-ing the peak summer con-struction season as it didwith the Fair Ground site.

• The CIL purchased aflatbed truck to transportpre-built ramp units.

• The crew leaders are out-standing, but labor issueshave created problems.The CIL utilizes workrelease prisoners. Theproblem was not with thework. The problem waswith the free cost becausethe CIL is a not-for-profit.

• A LLC (limited liability cor-poration) for the rampbuilding business was setup by an attorney and aCPA.

• A professor of marketingat SW University, Marshall,MN, worked under thedirection of the MarshallSBDC to develop the mar-ket study for the CIL. Aphone survey of the entireregion was conducted todetermine the percentageof the population in thenext five years that wouldbenefit from a home modi-fication to improve mobilityor independence.

• The research team proved,beyond question, the mar-ket for ramps.

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• Very little competitionexisted with few contrac-tors in the area buildingramps of quality that metcode requirements.

• Projections indicate thatSWCIL will significantlyincrease services and rev-enue over time whilemeeting client needs.

Although strong demand existedfor access ramps, the relativelyhigh costs of customized rampsin rural and economically chal-lenged regions limited thepotential. By seeking an innova-tive approach, CIL andDepartment of Corrections staffcombined mission objectives tojointly meet their respectivemission objectives. Theinmates, overseen by theDepartment of Corrections,were charged with a publicservice requirement ideallyassociated with the learning ofa skill set that could usefulafter release.

The program is receiving refer-rals from as far as one hundredmiles away. The business pur-chased a building and retains afull-time construction crew forthis revenue generating side of

the organization. The projecthas contracts to constructramps for the county, a daycarecenter, and seniors.

Recently, SWCIL completed anew business plan that expandsthe scope of residential servicesbeyond ramp construction. Thenew business model willencompass remodeling andretrofitting homes into accessi-ble dwellings for people withdisabilities and seniors.Services include bathrooms,kitchens, doors, and any otherproject that will make a homeaccessible to the residents.

CASE STUDY #2 – COMMUNITY RESOURCES FOR INDEPENDENCE (CRI) CIL - PENNSYLVANIA

The CRI project was a realestate transaction. It appearedto be the most basic of the busi-ness projects. CRI wished topurchase a 26,000 square footbuilding valued at $1,300,000, inwhich they were already renting60% of the total space. Thebasic plan was to reduce overalloccupancy costs, generate cashflow, and provide better long-


58

term growth opportunities interms of future space require-ments and expansion of thebuilding. The purchase of thebuilding would establish CRI astenant /owner / facility manag-er, while subletting extra spaceto tenants which would gener-ate extra revenues to offsetmortgage costs and reduceCRI’s expenses.

An initial assessment indicatedthat the building was in goodcondition, would generate rev-enue sufficient to eliminateCRI’s rental costs, and encour-age facility expansion. The proj-ect was viewed as a guaranteedsuccess at the outset, with min-imal risk and substantial fiscalreturn, but limited application todirectly further the CIL mission.

A development team wasassembled that included busi-ness specialists from the NYand PA SBDCs, a CPA, a non-conflicting local real estatedeveloper, and CRI’s Controller.Team members initiatedresearch on local real estatemarket conditions, pricing,terms, occupancy rates andgeneral characteristics.

Subsequently, fiscal modelingspreadsheets to aid in the pre-diction of financial impact ofchanging operating scenarioswere developed, along with cal-culations of beneficial tax treat-ments for the sale of depreciat-ed property to enable inclusionof such options with the pur-chase offer.

The team identified severalissues of strategic import,which required additionalresearch as the project movedforward. These included:

• budget reductions, • declining state support, • sharply increased insur-

ance costs, and, • possible significant

changes to the regulatoryenvironment which mayrequire the spin-off of one-third of their current oper-ations.

As a result of cooperativeefforts, a strong strategic busi-ness plan for CRI’s acquisitionwas developed. The situationspecific plan created a compre-hensive response to all overalloperating issues including mar-

59


keting options for space rental,development of a shared servic-es business unit, and broad out-lines of the lease requirementswith the CRI operating as land-lord.

The purchase of the buildingwas delayed due to budgetrestrictions and sharp reduc-tions in rental market demand,which created a less favorablecost / benefit analysis for theproject. It became clear thatthere was reluctance withinCRI’s management and Boardto assume the added level offinancial risk associated withthe purchase of the building.(Further reflection upon the dif-ferences among various CILprojects yielded the opinion thatthe pure cost savings nature ofthe project had not created thelinkage to the CIL mission foundin other projects.) The assis-tance team believed that signifi-cantly more time should bedevoted to programmaticimprovements that would bepossible with the budgetary sav-ings to further justify the appar-ent risk.

CASE STUDY #3 – THE LYNCHBURG AREA CENTER FOR INDEPENDENTLIVING (LACIL) – VIRGINIA

LACIL formed a technology con-sulting business called theCenter for Independent LivingTechnology Services (CIL Tech).CIL Tech developed a compre-hensive business model thatsells and services computerhardware, networks, and soft-ware to profit and non-profitorganizations in the greaterLynchburg area. They also pro-vide free training with the pur-chase of new equipment andconduct specialized classes invarious areas of computer sci-ence. This business is basedupon a pledge of confidentialityand guarantees quality andresponsive services.

Initially, the CIL staff facedchallenges in convincing theirBoard of Directors of the viabili-ty of the project. The concept ofutilizing scarce CIL monetaryresources for a higher riskenterprise was nearly incon-ceivable. Similar to private sec-tor companies requiring a com-prehensive and well thought-


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out business plan to convincebankers for support, the CILwas faced with a reluctantBoard of Directors. The CILturned to RRTC-ILM project tohelp strengthen the case forcommitment of funding. CILmanagement required assis-tance in setting sales goals,identifying projected costs, andemployment and legal issues.These are difficult concepts toexplain from a non-profit’s per-spective.

As the business plan pro-gressed, the Board of Directorsrequested a presentation by theBusiness Advisement Team andthe SBDC representative toallay their concerns. Followingthis presentation, the Board ofDirectors authorized $15,000 inseed capital money to fund theproject start-up. In less than sixmonths, the CIL Tech groupgenerated over $26,000 inbillings for services provided.This start-up phase sparkeddevelopment of an aggressiveadvertising campaign targetingbusinesses and not-for-profitorganizations. With the closestcompetition an hour away, theventure had little direct compe-

tition and appeared to have sig-nificant growth potential.

Walter Sabin, LACIL ExecutiveDirector, explains the overallimpact the project partnershiphas had on his organization.

"For LACIL, the GoingEntrepreneurial project beganmore than three years ago andhas had significant, positive,and long term implications onthe development and "culture"of our organization. Our projecthas been called "CIL Tech,"which is short for "Center forIndependent Living TechnologyServices," and began as astrictly for-profit venture. It hasevolved to a continuing costcenter for our organization thatis generating some revenue,albeit, not profits yet. While wehave not mastered the art ofmaking profit, our corporateculture and ways of thinkinghave been forever changed toadvocating for the "entrepre-neurial spirit" in our planningand operations. In short, thishas involved our Board andManagement to often examineour activities within at least twoperspectives:

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1.There is a "program" side toour corporation that involvesour mission, programs, services and initiatives, and

2. There is a "business" side to our corporation thatrequires entrepreneurialthinking, for-profit methodsand quality customer services.

It is a stretch for nonprofits toreach from providing neededservices to providing services/products that the free marketwill pay for, including the profitmargins. We advocate for thecontinuance of this nationwideproject, and will remain gratefulfor the mentoring, education,partnership building and otheropportunities that developed as a direct result of our partici-pation. Thanks for a job andinnovation well done."

CASE STUDY #4 – INDEPENDENT LIVING CENTER OF HUDSON VALLEY(ILCHV) – NEW YORK

ILCHV’s entrepreneurial projectcompliments and stronglyenhances the CIL’s mission.With assistance from the RRTC-ILM Going Entrepreneurial proj-

ect, ILCHV has developed anewspaper targeted towardpeople with disabilities. Thename of the newspaperIndependence Today. Currently,the organization uses a websiteto keep people with disabilitiesinformed on local and nationalissues. Transition to print mediais a natural transformation.

ILCHV has an informal networkof freelance writers who will beengaged for content along withwire service stories coveringissues of interest to people withdisabilities. The current websitehas some advertising, but withthe convolution of web-basedinformation, creating revenue ismore difficult. An initial assess-ment revealed that the CIL wascompassionate. Previous effortsto launch a publication wereunsuccessful, largely becausethey had been attempted with-out a comprehensive plan forimplementation.

The development of the busi-ness plan has been slow, butsteady. As with any operation,balancing time between existingCIL program management andproject planning has been diffi-cult. The ever-changing process


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addressed many concerns;most importantly, re-develop-ment of the target audience. At first, the network of over 500 CILs nationally was viewedas ardent supporters. ILCHVrealized that IndependenceToday addresses issues acrossall disabilities, so broadeningthe reach of the publication willenable the newspaper to attracta larger and more diverse baseof advertisers.

Other issues that have evolvedand are being addressedthrough ILCHV’s business planinclude:

• staffing, • capacity considerations, • advertisement sales, • profit and loss

expectations, and • frequency.

The plan should be completedwithin the next three months,followed by the implementationphase of the project.

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APPENDIX A

TAX CONSIDERATIONS: AN OVERVIEW

This section is designed to helpthe CIL entrepreneur to gain anunderstanding of the tax regula-tory environment in which theCIL is planning a for-profit ven-ture. This section covers issuesof taxation, business structure,and conflicts or opportunitieswhen not-for-profit develop for-profit ventures. Note: Thismaterial is not to be deemedwholly comprehensive orauthoritative. The reader isadvised to consult with appro-priate legal and tax counselbefore pursuing a particularcourse of action.

BASIC BUSINESS CONSIDERATIONS

A CIL looking for a businessstructure is searching for anopportunity that may promotethe CIL’s primary mission byenhancing or improving itsresources. The CIL is in an environment that usually placesmission fulfillment above financial benefits to the CIL’s

management, directors, boardmembers and parties related tothe CIL. Not-for-profit (NFP)laws in most states and IRSregulations grant such entitiesthe privilege of operating with-out the burden of an income tax,and in some cases, without theimposition of sales and realproperty taxes.

Tax-exempt status is granted toa variety of organizations, butthe five most common exemptorganizations are:

501 c (3): An entity organizedand operated exclusively forthe purposes of the followingactivities: religious, charitable,scientific, and literary or edu-cation, testing for public safe-ty, amateur sports competi-tion, or the prevention of cru-elty to animals or children.

501 c (4): Civic leagues, socialwelfare organizations andlocal associations of employ-ees operated to promote com-munity welfare through chari-table, educational or recre-ational activities.


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501 c (5): A labor, agriculturalor horticultural organization.

501 c (6): A business league,chamber of commerce, realestate board, board of trade orprofessional football league,operated to improve businessconditions.

501 c (7): Social or recreationalclubs.

In 1995, all not-for-profitsreported total assets of $1.9trillion and revenues of $899billion. 501 (c) (3) organizationsrepresented 12.4% of the U.S.Gross Domestic Product. TheIRS estimated that it received80,000 applications for taxexemption in fiscal year 2001.Out of need, most not-for-profits have learned that self-reliance is the best means oflong-term survival, with everyreligious, charitable, cultural,scientific, educational, and civicorganization competes for limit-ed public funding. In an attemptto meet its mission, more NFPs are developing assets and skills, which often haveapplication, and value, in themarketplace.

Given the desire for survival andthe competing desire of servingthe "primary mission," the CILis caught in the competition forresources. Congress and theInternal Revenue Service realizethat tax-exempt status gives anyNFP a unique advantage overfor-profit businesses. Publicmisuse of this privilege wouldhave a monumental negativeimpact on the national spirit forcharitable support. Therefore,abuse of NFP status serves asgrounds for termination ofexempt status. However,Congress does recognize thatthere will be times when anNFP will face opportunities thatmay serve the common good ofthe people, the government, theNFP and business. Therefore,NFPs are recognized as havingthe potential to develop for-profit subsidiaries that will notaffect the basic NFP status.

For example, ideally, a collegeis a place of higher educationand learning. However, aca-demic knowledge without prac-tical experience gives rise to anincomplete education. It makessense for students and acade-mia to participate in creative

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endeavors, which may result innew inventions, medications,and scientific theories. Ratherthan punish the college for itsprofitable creations, the InternalRevenue Code may, under cer-tain circumstances, impose anincome tax on the profits of theendeavor, called the unrelatedbusiness income tax (UBIT),allowing the NFP to keep theprofits of the unrelated busi-ness.

However, an NFP’s activitiesvary substantially from its pri-mary purpose and focus, theresources of an unrelated busi-ness activity may no longerretain the not-for-profit statusand revocation of the tax-exempt status takes place. Theloss of NFP status for a CILwould be catastrophic andavoided, but the operation ofnon-exempt activities, as a for-profit venture, eliminates thepotential challenge to the NFPstatus.

The NFP world is charged withrules at the federal and statelevel, which demand strictadherence to the primary pur-pose over personal enrichment.There is constant criticism of

fund-raising activities that ben-efit the fundraiser more thanthe intended NFP. These exces-sive costs to administer theNFP’s fundraising efforts oradministration of resources areconsidered abusive. As such,most states require auditedfinancial statements, whichsegregate the expensesbetween direct costs for the pri-mary purpose and administra-tive overhead. Tax returns, suchas Federal Form 990, clearlydisclose the compensation ofkey officers, employees anddirectors. Financial statementfootnotes are required to dis-close activities of the organiza-tion, significant fundraisingevents, and payments to par-ties, regardless of materiality.

While this open approach is vitalto maintaining the public trust,it may have a negative impacton the confidential nature ofsome very profitable tradesecrets. Key officers of a NFPare questioned about largecompensation packages andperks that for-profit businessesreadily bestow upon employees,such as bonuses and goldenhandcuff contracts that guaran-


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tee the ongoing confidentialityof the business.

The disclosure of special com-pensation packages may causea for-profit business to have itskey employees be wooed awayby competitors. There are fidu-ciary standards which limit anNFP’s Board of Directors’ abili-ties to assume risk, unless therisk is directly required in thecourse of promoting the NFP’sprimary mission. For example,the Board of an NFP cannottake risks with funds which arerestricted for the granting ofscholarships and fellowships,yet, a for-profit entity isrequired to commit all of itsresources as collateral for bankloans that require funding.

Finally, in the court of publicopinion, how would an NFP beviewed if its primary focus waspublic education about the per-ils of alcohol abuse, but it pro-moted its for-profit venture byhosting a cocktail party for aninvestor? Dichotomies such asthis between the for-profit andNFP world must be reconciled.

Beyond issues of public percep-tion, there are basic accounting

and operational issues. Forinstance, the NFP must com-pete for the services of talentedpeople while saddled with budg-etary constraints that limitupward mobility. How can theaverage NFP expect to hire tal-ented managers under thesecircumstances? When the NFPfurther complicates this situa-tion by developing for-profitoperational entities, two incom-patible ledger systems andrules for tax compliance mayoverwhelm CILs with sharedcosts that do not generate a netbenefit.

These basic considerationsassociated with CILs operatinga for-profit enterprise add com-plications. These issues mustbe addressed and opposingviewpoints need to be recon-ciled in the business planmodel. The reconciliation mustreceive approval of the CILBoard, its chief management,and operating and financial offi-cers. The buy-in process by keystakeholders results in the dis-covery that the commitmentand skill set necessary for theventure is present.

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TAX CONSIDERATIONS

The following section providesthe CIL reader with some basicconcepts geared toward a spe-cific definition of the tax-relatedrestrictions and examplesappropriate for CILs, includingexamples cited in IRSPublication 598, whichdescribes the UnrelatedBusiness Income Tax (UBIT).

PROHIBITION AGAINST PRIVATE INUREMENT (PERSONAL BENEFIT):

This prohibition means that the person(s) who created orcontrol a tax-exempt organiza-tion, including its members,employees, and other insiders,may not acquire any of its funds or assets, except when:

• They are paid "reasonablecompensation", or relatedexpenses, for services rendered, or

• They pay an amount equalto the "fair market value"of any of the organizationsassets they receive.

The Taxpayers Bill of Rights 2includes penalties, referred toas intermediate sanctions,against individuals who enterinto "excess benefit transac-tions" with a 501 c (3) or c (4)organization. On July 30, 1998,the Treasury Department issuedproposed regulations to clarifycertain key terms used in theapplication of the intermediatesanctions.

An "excess benefit transaction"occurs when the NFP providesan economic benefit to a dis-qualified person that exceedsthe value of the considerationgiven by that person. A ‘disqual-ified person’ is anyone in a position to exercise substantialinfluence over the NFP’s affairs.Disqualified persons include:

- Family members of theinsider

- Entities owned 35% ormore by the insider

- Voting members of theNFP’s governing board

- The NFP’s president, chiefexecutive officer, chiefoperating officer, treasureror CFO


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- Any person who has orshares ultimate responsi-bility for implementingdecisions over the organ-ization’s management,administration, operations,or financial assets

- Any persons who exercisesubstantial influencebased upon a facts and cir-cumstances test.

Persons deemed not to havesubstantial influence include:employees who are not highlycompensated by definition(earning less than $85,000, sub-ject to annual inflation adjustedrules promulgated by theTreasury), if they are not other-wise disqualified and are notsignificant contributors (definedas one who gives at least $5,000and the gift is at least 2% oftotal contributions).

The penalties, which are 25% ofthe excess benefit increasing to200% of the excess benefit if thebenefit is not repaid, areassessed against the disquali-fied person. In addition, an offi-cer, director or trustee whowillfully participates in theexcess benefit transaction issubject to a 10% penalty.

While the Treasury Departmenthas offered extensive advice inthe definition of a disqualifiedperson, the term substantialinfluence has the potential tobe elusive. NFPs are required tokeep adequate records to docu-ment compensation decisions,especially where revenue-shar-ing arrangements exist. Therelevance of the private inure-ment issue is important whenconsidering compensation andcontracts relative to the startupof an entrepreneurial enterprisewithin the confines of a CIL.

LOBBYING ACTIVITIES

A for-profit organization mayexpend significant resourceslobbying various levels of gov-ernment to achieve specificresults. For instance, inventorsof new medicines or medicaldevices may need to influenceMedicare and health insurancelegislation in order to have thecosts of those medicines ordevices reimbursed by insur-ance coverage. Unfortunatelyfor the NFP, IRC Sec. 501 (c) (3)prohibits lobbying activities, andsuch excessiveness can resultin imposition of an excise tax.

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However, even in the NFParena, organizations areallowed to provide educationalinformation and respond to governmental inquiries withoutviolating the law. If CIL manage-ment has questions in this area,they are encouraged to seekclarification from legal counsel.A serious violation of the lawcan result in loss of the CIL’s501(c) (3) tax exempt status,termination of certain officersor directors, or a variety ofother creative sanctions.

QUID PRO QUO CONTRIBUTIONS

In business, there are reason-able limitations on business-related expenses such as mealsand entertainment expendi-tures, sporting events and otherforms of client development.The for-profit can spend largesums of money by treating thevalue of gifts as taxable incometo the recipient, and then addthe gross amount of the bene-fit(s), to cover tax withholdings.However, there is no require-ment of public disclosure.

A CIL may entertain its benefac-tors, although there may beperceived constraints dealing

with excessive entertainment.Disclosure may be required tomajor contributors. Imagine ahypothetical situation whereGreenpeace lavished a majorcontributor with a trip to a for-eign country, the sight of anenvironmental mission. This tripand associated costs could bequestioned by the IRS and cre-ate a major exposure.

A business cannot deduct actualgifts in excess of $25, unlessthe recipient reports the excessas taxable income. Again, thereis no public disclosure.Conversely, a CIL must disclosethe value of any benefits, otherthan incidental benefits, whichare received by contributors inexchange for donations. This isan example where scrutiny anddisclosure requirements arehigher for the CIL, and mayadversely impact businessopportunities.

UNRELATED BUSINESSINCOME TAX (UBIT)

When a CIL has created anincome opportunity, it does notnecessarily have an automaticneed to set up a for-profitorganization. When a new


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business develops, it is usuallysmall enough that it can behandled without serious tax-related consequences within theconfines of the NFP structure.This would correspond to theearly stages of a business venture.

The IRS website athttp://www.irs.gov/charities/arti-cle/0,,id=96104,00.html offerssome discussion on the defini-tion and determination of theUBIT. Generally, tax is assessedon gross revenues earned in an unrelated activity, minusdeductions directly connectedwith the income, and minusindirect expenses, which areallocable between the exemptfunctions and the businessactivity. The tax is generallycomputed at a standard corpo-rate rate, which may vary from15% to 35% on net unrelatedbusiness income.

Voluntary compliance with this tax assessment has beendeclining. In 1997, the IRS collected approximately $486million from UBIT voluntaryassessments, compared to $173 million in 1998. This is significant in light of theincreased number of NFPs over

the same period. As a result,the IRS has warned that NFPscan expect audit inquiries oftheir in-house for-profit activi-ties. From a practical viewpoint,the IRS has budget constraintsof its own, which may preventsignificant compliance testing.

IRC Sec. 513 (a) defines anunrelated trade or business as any trade or business notsubstantially related to theexercise or performance of theorganization’s exempt status.IRS Publication 598 goes togreat lengths to try to define theterm not substantially related.However, it does so by inferenceand example. For instance, apayment from a sponsor for anad in a brochure may bedeemed a qualified sponsorshippayment, and exempt from theUBIT, if the sponsor receives nosubstantial benefit other thanthe use or acknowledgement ofthe sponsor’s name or logo.However, if there is an endorse-ment of the sponsor’s productsor services, price information,inducements to purchase, sellor use the sponsor’s products,the sponsorship may bedeemed a paid advertisementand subject to UBIT. This con-

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cept can be an elusive trap tothe entrepreneur within a CIL.Guidelines provide that income-producing activities, which arecarried on by volunteers orwhich are not "carried on regu-larly" by the NFP, are exemptfrom UBIT.

Generally, certain other itemsare exempt from the UBIT tax,including:

- Dividends- Interest- Annuities- Other investment income- Royalties- Rents from real property,

but not personal property- Gains and losses from the

disposition of property, but not inventory or stock in trade, or property held for resale in the ordinary course of business

The concept of UBIT should notbe automatically viewed as animpossible hurdle for the CIL,which is seeking to protect itstax-exempt status and enhanceits economic viability. However,the officers and board membersshould be cognizant of the

potential problems and addressthis issue as part of the overallbusiness plan. Further, guidance from qualified legaland accounting counsel is necessary and strongly recommended.

The CIL and a related for-profitbusiness should not overlookother incidences of tax exposuresuch as the assessment of asales or use tax associated withthe sale or purchase of goodsand services not directly cov-ered by the exemptions affordedby state and local law. Again,specific guidance should besecured by the CIL.

THE BUSINESS STRUCTUREAND LEGAL FORM

Armed with these decision-making tools, the CIL entrepre-neur must determine the mostfavorable legal structure inwhich to grow the for-profitbusiness.

A CIL typically could start abusiness as the equivalent of asole-proprietorship by the factthat the development of a prof-itable concept arises from thenormal activities and services


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provided by the CIL in theprocess of service delivery to itsconsumers. Unfortunately, thisapproach does not offer thegoal of having the for-profitbusiness as a separate legalentity. As a proprietorship, theCIL’s assets would be exposedto all of the risks associatedwith the new business, and thetax exempt status of the CILmay be exposed. At the veryleast, an UBIT would be anissue. This approach is not rec-ommended.

Risks of the new activity can belargely controlled through prop-er insurance coverage, thedevelopment of managerialcontrols and systems to monitordevelopment, growth and prof-itability of the new activity, andaccounting controls to identifythe components of informationthat generate UBIT. In certaincases, it may be advisable forthe new business to be segre-gated from the main focus ofthe CIL for legal liability. Thiscan be done through a limitedliability company (LLC), limitingthe liability exposure of the CIL’sother assets. Again, this will notprotect the CIL from rules ofUBIT, private inurement or gen-

eral disclosure of the activity inthe CIL’s audited financial state-ments. However, it does providea corporate-like protection frombusiness creditors.

THE CIL "CONTROLLING" AN NFP

If the new business is anacceptable NFP activity, the CILmay isolate the activity withinanother newly formed NFP, withthe lead or parent NFP oversee-ing the activity through a com-mon leadership. However, theBoards of Directors should notbe identical. For instance, a501(c)(3) may own athleticequipment as part of its serviceof training athletes, but it maynot be able to provide use of theequipment to outsiders who arevolunteers. An opportunity mayexist, with proper structure, fora social and recreation club,under 501(c) (7) to purchase andmaintain equipment by dues-paying members, who providevolunteer services to the ama-teur athletes. In this case, the501 (c) (3) may own, or work inparallel with the 501 (c) (7)without the potential allegationsof private inurement or UBIT.

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(This example is for discussionpurposes and not intended to beall-inclusive).

THE CIL WITH A FOR-PROFIT C-CORPORATION SUBSIDIARY

In situations where a CIL ownsa controlling interest in a for-profit (FP) corporation, an argu-ment can be made that the FPis an alter ego of the CIL, andthat the two should be com-bined for the purpose of deter-mining the entity’s tax-exemptstatus. However, barring fraud-ulent or sham transactions,where the parent is not involvedin day-to-day activities of theFP, or where the officers andBoards of Directors are notidentical, the IRS will respectthe separate identities of the FPand NFP.

It is often beneficial to haveincome flow to the CIL-parentfrom the FP-subsidiary in afashion that does not defeat theCIL’s tax-exempt status. A wayto do this is to measure sharedcosts for occupancy, staffing,equipment and supplies, withthe FP reimbursing the CIL.Another methodology is for theCIL to lend start-up money, at

appropriate rates of interest, tothe FP. In certain cases, the FPmay be licensed by the CIL touse its name, logo or acronymin selling products. This couldresult in a payment of a royaltyto the CIL. Congress was awarethat these approaches couldgenerate an unfair tax-savingsopportunity, and thereforeimplemented IRC Section 512(b)(3) to define these payments asUBIT income. Attempts arebeing made to exempt rents,royalties, and interest fromUBIT when paid at fair marketvalue. Exceptions deal with pay-ments made by a FP subsidiaryto its NFP, when these pay-ments are not tax deductions tothe FP, such as dividends in aC-Corporation. Another excep-tion occurs when the NFP ownsless than 50% of the FP stock,controlling interest.

THE CIL WITH AN S-CORPORATION SUBSIDIARY

The Small Business JobProtection Act of 1996 allows anNFP to be a stockholder in anS-Corporation. An S-Corpora-tion pays no federal (and, insome cases state) income taxes.Instead, the S-Corporation


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earnings are attributable to thestockholder. The earnings of theS-Corporation, which are attrib-utable to a tax-exempt organi-zation, are automatically treatedas UBIT income. The gain orloss on sale of the stock of theS-Corporation is also subject to UBIT.

THE CIL AS A PARTNER IN APARTNERSHIP (INCLUDINGLIMITED PARTNERSHIPS)

The IRS has historically taken anegative position on partner-ships where a NFP is involved,except in cases where the NFP’srole was strictly passive and notcontrary to the prime objectiveof the NFP. A passive role wouldinclude the NFP being a limitedpartner in a partnership of aninvestment. The IRS reasonsthat the NFP, in partnering withFP entities, is using its effortsto the private inurement of itsFP partners. As a result, sucharrangements could result inautomatic revocation of theNFP’s tax-exempt status.

The current IRS position hassoftened slightly. A charitableorganization will lose its tax-free status if it participates as

a general partner in a limitedpartnership, unless the princi-pal purpose of the partnershipis the furtherance of the NFP’scharitable purposes. Even if thelimited partnership meets thesecriteria, the exemption from taxwill be revoked if the NFP, asgeneral partner, is not ade-quately insulated from the day-to-day management responsi-bilities and/or the limited part-ners receive an undue return.Bruce R. Hopkins provides amore thorough understandingof this technical topic, includingits background and history inchapter 46 of The Law of TaxExempt Organizations.

Joint ventures do not face thesame tax scrutiny, because ajoint venture is not a businessactivity carried on in a regularmanner over a long period oftime. However, the IRS will lookto the nature of the underlyingactivity to determine whetherthe joint venture deviates fromthe NFP’s prime objective orwhether the private inurementrules are violated. If so, the tax-exempt status again can be lost.The best advice for a CIL is toavoid partnership structuresuntil the IRS revises its positionor rules, where the partnership

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purpose is not the same as thecharitable purpose.

FINANCIAL STATEMENT ANDDISCLOSURE CONSIDERATIONS

What discussion would be com-plete without including general-ly accepted accounting princi-ples? The American Institute ofCertified Public Accountants(AICPA), the FinancialAccounting Standards Board(FASB) and a variety of othersources promulgate accountingrules. When a NFP reportsinformation in financial state-ments, the information mustmeet certain minimum stan-dards in order to be useful toreaders. In the case of NFP’s,the interested readers includethe NFP’s creditors, donors,would-be donors, the IRS, andin some cases, the AttorneyGeneral of the state.

When deciding on the form ofyour for-profit entity, be awarethat disclosure rules with relat-ed parties are stringent. AICPAStatement on Auditing StandardNo. 6 effectively describes relat-ed parties as anyone having asignificant direct or indirectinterest or degree of control in

an organization. In the case of aFP subsidiary, all funds trans-ferred between the FP and NFPmust be disclosed, as well asthe intended nature of thetransactions. Year-end balancesdue to and from the entities, aswell as the cause of the rela-tionship require disclosure. TheFASB is working on a project todetermine whether a NFPshould issue combined financialstatements with a FP subsidiaryin order to be meaningful.

The relevance of these issueswould be:

• Combined financial state-ments could confirm aview that disproportionateefforts of the NFP are notprogram-related in the FP.

• The detail of disclosure,combined with informationavailable from the annualFederal Form 990, couldprovide sufficient data tocompetitors of the FP bus-iness subsidiary, reducingthe FP’s ability to compete.

These considerations may be factors impacting the CILentrepreneur and should not be overlooked in the planningprocess.


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CREDITS AND OTHER REFERENCE SOURCES

Julie Floch, CPA, Partner atRichard A. Eisner & Company,LLP, New York, New York. (212-355-1700) Technical Advisor

Hopkins. B. R. (n.d.) The Law of Tax-Exempt Organizations,6th Ed., ISBN: 0-471-47122-4,July 2004

The PPC Nonprofit Update:Practitioners PublishingCompany, Fort Worth, Texas,monthly newsletter

National Center for NonprofitBoards, Washington, D.C. (202-452-6262)

Internal Revenue ServiceWebsite http://www.irs.ustreas.gov

John Oehler, CPA, LumsdenMcCormick, LLP, Buffalo, NewYork (716-856-3300)

New York State Small Business Development Centerand the The CIL Management Center of the

Western New York Independent Living Project, Inc.

A B U S I N E S S G U I D E F O R C I L SBEING ENTREPRENEURIAL

Documents

Being Entrepreneurial - A Business Guide for CILS · BEING ENTREPRENEURIAL New York State Small Business Development Center and the The CIL Management Center of the Western New York