Defining Social Sector Franchising
NEW! Social Franchising "Explainer Video" Series
If you are new to social franchising, this video series will provide a solid overview of the principles of social franchising and the practicalities of creating and running social franchises.
If you are new to social franchising, this video series will provide a solid overview of the principles of social franchising and the practicalities of creating and running social franchises.
What is Social Sector Franchising?
Commercial franchising and social franchising are variations on the same basic strategy for expanding a business. They differ in just two ways:
Social franchised businesses, like those operated by traditional NGOs (nongovernmental organizations) are primarily developed to offer products and services that people need — not simply want — such as healthcare, safe drinking water, sanitation, clean energy, and education. These are social enterprises whose creation is targeted to achieve goals such as those set in the 2030 Sustainable Development Goals established by the United Nations (https://sustainabledevelopment.un.org/sdgs).
With the exception of the different profile of the targeted consumer, social sector franchises and commercial franchises are quite similar. In contrast to the customer who walks into a McDonald’s or a Marriott, the consumer targeted by social franchise systems often can’t afford to pay the entire cost of the goods and services they need. Because of that, social franchisors are usually unable to generate the royalty and other revenue and fees necessary to independently sustain the overall business.
Being independently sustainable is the hallmark of commercial franchising. That is the significant difference between social and commercial franchisors.
- The type and purpose of the products and services offered by the business being franchised
- The profile of the target customer
Social franchised businesses, like those operated by traditional NGOs (nongovernmental organizations) are primarily developed to offer products and services that people need — not simply want — such as healthcare, safe drinking water, sanitation, clean energy, and education. These are social enterprises whose creation is targeted to achieve goals such as those set in the 2030 Sustainable Development Goals established by the United Nations (https://sustainabledevelopment.un.org/sdgs).
With the exception of the different profile of the targeted consumer, social sector franchises and commercial franchises are quite similar. In contrast to the customer who walks into a McDonald’s or a Marriott, the consumer targeted by social franchise systems often can’t afford to pay the entire cost of the goods and services they need. Because of that, social franchisors are usually unable to generate the royalty and other revenue and fees necessary to independently sustain the overall business.
Being independently sustainable is the hallmark of commercial franchising. That is the significant difference between social and commercial franchisors.
What is the “Bottom of the Pyramid”?
The term bottom of the pyramid (BOP) refers to the people who live in extreme poverty at the bottom of the wealth pyramid.
It is estimated that there are approximately 7.4 billion people in the world today, with 4 billion living on less than $8.25 per day. The BOP refers to the ones who survive on less than $2.50 per day. Half the world’s wealth is controlled by 1 percent of the world’s population, mainly in developed countries. The remaining 99 percent of the world’s population shares the other half. When plotted on a graph, the economic dispersion resembles a pyramid with the extreme poor being the largest segment, making up the base of the pyramid.
The goal of social franchising is instead the natural expansion of the economy in these markets sufficient to create sustainable and widespread opportunities for local and natural wealth creation. Just as commercial franchising is an alternative growth and distribution strategy in traditional markets, social franchising is an alternative strategy to consider at the bottom of the pyramid. In many important ways, the tools and structures found in social franchises can be adopted by traditional NGOs to improve their performance, just as commercial franchising techniques can be used to improve the performance of other for-profit enterprises.
It is estimated that there are approximately 7.4 billion people in the world today, with 4 billion living on less than $8.25 per day. The BOP refers to the ones who survive on less than $2.50 per day. Half the world’s wealth is controlled by 1 percent of the world’s population, mainly in developed countries. The remaining 99 percent of the world’s population shares the other half. When plotted on a graph, the economic dispersion resembles a pyramid with the extreme poor being the largest segment, making up the base of the pyramid.
The goal of social franchising is instead the natural expansion of the economy in these markets sufficient to create sustainable and widespread opportunities for local and natural wealth creation. Just as commercial franchising is an alternative growth and distribution strategy in traditional markets, social franchising is an alternative strategy to consider at the bottom of the pyramid. In many important ways, the tools and structures found in social franchises can be adopted by traditional NGOs to improve their performance, just as commercial franchising techniques can be used to improve the performance of other for-profit enterprises.
What's an NGO?
Non-governmental organizations are usually non-profit and sometimes international organizations that are independent of governments and international governmental organizations (though often funded by governments). They are active in humanitarian, educational, healthcare, public policy, social, human rights, environmental, and other areas to effect changes according to their objectives.
NGOs are usually funded by donations, but some avoid formal funding altogether and are run primarily by volunteers. Some may have charitable status, while others may be registered for tax exemption based on recognition of social purposes.
Since the end of World War II, NGOs have had an increasing role in international development, particularly in the fields of humanitarian assistance and poverty alleviation. The term 'NGO' is not always used consistently. In some countries, the term NGO is applied to an organization that in another country would be called an NPO (nonprofit organization), and vice versa.
Both NGOs and social franchisors may be able to deliver the same products and services to a community at the base of the pyramid. That is, both methods share a common mission. However, franchising, as a method of distribution, has essential attributes that are lacking in traditional NGOs:
To be successful, a social franchisor needs to focus on the essential social mission it shares with NGOs, but it needs to deliver those goals using the business and legal standards and practices found in commercial franchising.
NGOs are usually funded by donations, but some avoid formal funding altogether and are run primarily by volunteers. Some may have charitable status, while others may be registered for tax exemption based on recognition of social purposes.
Since the end of World War II, NGOs have had an increasing role in international development, particularly in the fields of humanitarian assistance and poverty alleviation. The term 'NGO' is not always used consistently. In some countries, the term NGO is applied to an organization that in another country would be called an NPO (nonprofit organization), and vice versa.
Both NGOs and social franchisors may be able to deliver the same products and services to a community at the base of the pyramid. That is, both methods share a common mission. However, franchising, as a method of distribution, has essential attributes that are lacking in traditional NGOs:
- Consistent, sustainable, replication in the delivery of the franchisor’s brand promise to consumers, possible because of the commercial systems that are foundational in its approach
- The creation of wealth through supported local ownership of the businesses by franchisees and the jobs those formula entrepreneurs create
To be successful, a social franchisor needs to focus on the essential social mission it shares with NGOs, but it needs to deliver those goals using the business and legal standards and practices found in commercial franchising.
Why use franchising to scale a social enterprise?
A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being — this may include maximizing social impact alongside profits for external shareholders. What differentiates social enterprises from other organizations is that their social mission is as core to their success as any potential profit.
Franchising is a way to achieve a social impact on a large scale because franchising achieves three key things that other methods of distribution don’t:
We stress these three things because the root problem in poor countries is that many things we might find substandard in an industrialized world are acceptable because they are unavailable or in short supply. Unlike in rich countries, where standards drive the quality of most things in commerce, it is often the mere availability of the product and service that drives purchasing decisions at the base of the pyramid (BOP). The compliance with standards is what delivers the greatest social impact.
In both commercial and social franchise systems, the following are true:
It is the endemic economic difference in the markets they serve that creates the challenge for social franchisors. Instead of living off of the royalty and other continuing fees paid by franchisees from the local sale of their products and services, the franchise system requires substantial economic support from donors or other economic sponsors until it can create critical mass and achieve internal sustainability. Even though social franchisors have the capability of achieving their goals more effectively than a traditional NGO, the economic realities of the market they share are the same.
Franchising is a way to achieve a social impact on a large scale because franchising achieves three key things that other methods of distribution don’t:
- It standardizes what people do so that when they perform services they do it in a manner that achieves the result sought — such as effective quality care in the case of primary care.
- There is something to replicate because the format of the business has been tested and operating procedures have been put in place. Scaling doesn’t just mean opening more locations, but replicating a standardized unit.
- If the first two are accomplished, then economies of scale may be exploited to bring down costs while standards continue to be met.
We stress these three things because the root problem in poor countries is that many things we might find substandard in an industrialized world are acceptable because they are unavailable or in short supply. Unlike in rich countries, where standards drive the quality of most things in commerce, it is often the mere availability of the product and service that drives purchasing decisions at the base of the pyramid (BOP). The compliance with standards is what delivers the greatest social impact.
In both commercial and social franchise systems, the following are true:
- The franchisor licenses to a franchisee its brand, system, and methods of doing business.
- The franchisee operates and manages their independently owned business to the brand standards of the franchisor.
- The end-user customer benefits from the consistency and quality standards set and enforced by the franchisor.
- The business owner (franchisee) is selected and supported by the franchise system.
- As an independently owned and managed business, the franchisee earns a living and creates equity for themselves and for their families.
- The franchise system creates jobs in the communities it serves.
- The franchise system creates consumer brand awareness, and its capability to be effective and economically efficient makes it competitive against the existing competition.
- Even though the franchise system requires a funding source to overcome poverty at the consumer level — and may also require subsidies to support franchisee development (sales of franchises) — at a foundational level, just as with any well-structured commercial franchise, social franchises are designed, developed, and managed to achieve financial sustainability.
It is the endemic economic difference in the markets they serve that creates the challenge for social franchisors. Instead of living off of the royalty and other continuing fees paid by franchisees from the local sale of their products and services, the franchise system requires substantial economic support from donors or other economic sponsors until it can create critical mass and achieve internal sustainability. Even though social franchisors have the capability of achieving their goals more effectively than a traditional NGO, the economic realities of the market they share are the same.
What commercial franchise methods can be applied to social franchises?
There are multiple ways to apply commercial franchising to social franchising. Three common distribution models are:
- Distribution of products
- Fractional (bolt-on to an existing business)
- Business format franchising
What are the Differences Between a Social Franchise and a Micro Franchise?
You will frequently see the term micro-franchise used interchangeably with social franchise, but there is a difference. In a social franchise, the franchisor is targeting the concept to solving a social need, whereas in a micro-franchise the franchise system is used to increase access to business opportunities that enable people to lift themselves out of poverty.
That said, a social franchise can also be designed as a micro-franchise. This model is referred to as a hybrid social/microfranchise. Jibu (http://jibuco.com) and CFW (www.cfwshops.org) are examples of hybrid social/microfranchises. In a micro-franchise, the investment cost for the business owner is usually minimal, and the potential for profitability is relatively high.
That said, a social franchise can also be designed as a micro-franchise. This model is referred to as a hybrid social/microfranchise. Jibu (http://jibuco.com) and CFW (www.cfwshops.org) are examples of hybrid social/microfranchises. In a micro-franchise, the investment cost for the business owner is usually minimal, and the potential for profitability is relatively high.
What aspects of social franchising are unique to the social sector?
There are many challenges in the social sector setting that necessitate the need for contextualizing the franchise model for mission-driven organizations. These include:
- The funding ecosystem
- Balancing social and business objectives (See FAQ “What are funding sources for social sector franchises?”)
- Capabilities deficit and lack of business mindset
- Lack of capacity
- Lack of knowledge of or exposure to franchising
- Dynamics of power and privilege
- Cultural contextualization and norms
- Lack of examples for success in the social sector
- Role of evidence and impact metrics and evaluation
Is commercial franchising in low-income markets the same as social sector franchising?
No. While commercial franchising has already shown its capability to be a key ingredient in developing economic opportunity and transforming inner city communities domestically, it is not the same as social franchising. It is a significant element of economic development in low-income urban areas; because brand standards and the structures in a franchise ensure the ability of a franchise to achieve and uniformly maintain those standards, economic opportunity and local wealth is created. In addition to the creation of local jobs, the products and services change the human dynamics in neighborhoods because the same consumer opportunities available in affluent neighborhoods are now available in their neighborhood.
However, this is not the same a mission-driven organization using franchising to expand, nor is it the same as micro-franchising which gives those living in poverty a shot at business ownership and equity building.
However, this is not the same a mission-driven organization using franchising to expand, nor is it the same as micro-franchising which gives those living in poverty a shot at business ownership and equity building.
Who are typical social sector franchisees?
Social franchisees, like commercial franchisees, are local business owners who operate their franchised business at a profit. Although the social mission of the business may be important to them, because the business is generally their primary source of income, the social mission is usually secondary to their profit incentive. Therefore, in selecting social franchisees, in addition to all the other requirements found in the selection of commercial franchisees, the social franchisor must ensure that the franchisee understands and accepts the critical need of the social mission. It is because of the profit incentive that many social franchises are started — not solely to solve a social need, but because the franchisor saw the social need as a business opportunity.
Again, because of its adaptive nature, franchisees can be single-unit or multi-unit owner/operators but can also include social investors seeking to own and operate a multi-unit operation which will employ professional staff to work within the local units. Also, analogous to partnerships investing in a commercial franchise, co-ops may invest in social sector franchises, making investment more affordable.
Again, because of its adaptive nature, franchisees can be single-unit or multi-unit owner/operators but can also include social investors seeking to own and operate a multi-unit operation which will employ professional staff to work within the local units. Also, analogous to partnerships investing in a commercial franchise, co-ops may invest in social sector franchises, making investment more affordable.
What is franchise compliance and how does it work in a social franchise?
In any franchise system, including social franchise systems, a rigorous compliance system is required to maintain control over the delivery of the brand promise to consumers. This is achieved through clear communication as to system standards and requirements as well as visits to individual units by field personnel trained to coach franchisees and monitor that brand standards are being met. By tying the franchisees’ continuing license to compliance with brand standards, unit performance metrics and financial sustainability, the value of the franchise deters them from behaving in ways that would risk losing franchise rights.
What are examples of social sector franchises?
Social Sector Franchise Funding
How do low-income consumers pay for services and products offered by a social sector franchise?
Social franchisors — although capable of achieving and replicating consistent brand standards and sharing in all the other performance and economic benefits found in commercial franchising — require subsidies at multiple levels to offset the cost of serving the difficult-to-reach and low-income customers.
What is a “double bottom line”?
Ideally, over time a social franchise will deliver both social and financial returns to stakeholders (often referred to as double bottom line). Financial results are critical to the mission because it is financial success at the unit level that drives expansion to more franchisees in additional markets. Through scaling (developing sufficient locations to service the market and create an economic base for the system), the additional locations will increase the overall social impact of the franchise system.
How are Social Franchises Funded?
Social franchisors require funding at various stages in the evolution of the program. An initial investment might fund prototype development and testing. This might be followed by further investment in the design and development of the franchise program (for example, professional fees) and the social franchise organization. Funding might also include raising the necessary capital to sustain the social franchisor through maturity. Where the social franchise program includes funding of franchisee startup costs, these capital needs also must be understood.
An often-overlooked element in NGOs is the requirement for basic business tools including training programs, operations manuals, and a structured approach to field support and the necessary supply chain. As part of the social franchisor’s planning for seeking social investment and donations, these stages and requirement need to be clearly defined, and the capital required, without overpromising, must be clearly identified.
Often the social franchisor is challenged by the changes to their program tied to donor funding. The missions of the social franchisor and the social investor need to be in alignment and must stay focused on the social franchisor’s mission. Continually changing the offering of any business, especially a social franchisor, does not allow for the consistent and sustainable approach necessary in franchising. Where a social franchisor is willing to make frequent or material system changes to its franchise program in order to be the recipient of donor funding from additional sources, the ability to maximize any of the benefits of franchising are put into severe jeopardy.
Also, although reporting by the donor is expected, and the discipline it gives to the social franchisor is a wonderful counterbalance to an entrepreneurial or inexperienced management team, too much advice and assistance or advice and assistance that is periodic and conflicting can be very disruptive to an effective social franchise system.
Social franchisors, as with any well-developed franchise system, will create internal reports and measures to evaluate the system. Social investors and donors, though, may want the franchise system to adopt additional and often burdensome detailed reporting that strips the franchisor’s efficiency. Making certain at the outset of the donor relationship that the reporting package you use internally to manage the business enables needed data gathering for the donor, will alleviate that problem.
Donors participating in a social franchise organization need to understand that their flexibility in adapting to the social franchisor’s reporting regimen rather than forcing an additional reporting obligation on the franchisor will improve the efficiency and cost-effectiveness inherent in well-developed franchise systems.
One of the inherent problems in an NGO’s reliance on social investing is that social franchisors, as would be found in any commercial business, have a long-term view of their business out of necessity. Often donor funding comes with a short window and is based on the grant period. This is often too short for adequate planning by the social franchisor. The key here is for the social franchisor to seek longer commitment terms from the donor.
The goal of every social franchisor is to achieve adequate scale and internal resources as a franchisor to begin to wean itself away from the continuing cycle of responding to grant proposals. Where a relationship has been established with social investors and donors, there should be a clear understanding that although funding requirements may become diminished over time, there will likely still be the need for some support for a lengthy period. Donors that do not enter the relationship with that understanding may instead prematurely see the social franchisor as successful and move their donations to another NGO or social franchisor at an earlier time frame than a social franchisor requires.
As with social franchisors, donors also have missions on how they want to employ their capital. Many, rather than donate to the overall mission of the grantee, want to target their donations to specific elements of the social franchise program. You will frequently see donors that don’t allow the donated funds to be used for overhead or administrative requirements and instead be “button holed” for specific and defined elements that the franchise system is trying to achieve. This has been one of the principle causes for problems in traditional NGOs, as it has required them to seek additional funding for other elements of their program, and in both a social franchise and an NGO it creates system stress that takes the focus of management off of its critical system mission.
As the social franchise system begins to expand, the normal and natural internal funding resources available from any franchise system should begin to limit the requirements for needed social investment and donations. As in any franchise system, these will naturally include franchise fees, royalties, income from supply chain sales, a la carte fees, and more. As these internal resources become available, with the need to continually seek outside funding, management can focus more of its time on the system’s mission, which is the essential goal of any franchise.
Successfully structuring the relationship between the social franchisor and the social investor and donor can also be beneficial to the funding organizations. Once scale and internal resources are the mainstay of the social franchisor, the achievements of the social investor’s focused approach reflect positively on the donor organization. With an increased competency within the social franchisor, to the extent the social investor has been seeking a return on its investment, at this point that possibility — not possible in a traditional NGO — is now reasonably possible.
Social franchisors and commercial franchisors . . . if there is a material difference, it rests in the mission. For the commercial franchisor, the purpose is making money and achieving a return on investment for its stakeholders. Social franchisors, while seeking sustainability and the opportunity not to require third-party funding, are mission-driven to the stated purpose of the organization: the delivery of high-quality medical services and prescription drugs or fresh water to consumers at the base of the pyramid for example. Losing sight of the social mission can reflect poorly on the social franchisor, its management, and the social investors and donors, if not properly managed.
At a point in time, as in any well-managed franchise system, the funding of a social franchisor may include traditional banks and other loan programs. Where the management of the social franchisor is unfamiliar with those more traditional approaches to business funding.
It is essential for management to consult with professionals that can effectively guide them through both the economics of the transactions and the legal and tax requirements that may become necessary within the structure of the organization.
An often-overlooked element in NGOs is the requirement for basic business tools including training programs, operations manuals, and a structured approach to field support and the necessary supply chain. As part of the social franchisor’s planning for seeking social investment and donations, these stages and requirement need to be clearly defined, and the capital required, without overpromising, must be clearly identified.
Often the social franchisor is challenged by the changes to their program tied to donor funding. The missions of the social franchisor and the social investor need to be in alignment and must stay focused on the social franchisor’s mission. Continually changing the offering of any business, especially a social franchisor, does not allow for the consistent and sustainable approach necessary in franchising. Where a social franchisor is willing to make frequent or material system changes to its franchise program in order to be the recipient of donor funding from additional sources, the ability to maximize any of the benefits of franchising are put into severe jeopardy.
Also, although reporting by the donor is expected, and the discipline it gives to the social franchisor is a wonderful counterbalance to an entrepreneurial or inexperienced management team, too much advice and assistance or advice and assistance that is periodic and conflicting can be very disruptive to an effective social franchise system.
Social franchisors, as with any well-developed franchise system, will create internal reports and measures to evaluate the system. Social investors and donors, though, may want the franchise system to adopt additional and often burdensome detailed reporting that strips the franchisor’s efficiency. Making certain at the outset of the donor relationship that the reporting package you use internally to manage the business enables needed data gathering for the donor, will alleviate that problem.
Donors participating in a social franchise organization need to understand that their flexibility in adapting to the social franchisor’s reporting regimen rather than forcing an additional reporting obligation on the franchisor will improve the efficiency and cost-effectiveness inherent in well-developed franchise systems.
One of the inherent problems in an NGO’s reliance on social investing is that social franchisors, as would be found in any commercial business, have a long-term view of their business out of necessity. Often donor funding comes with a short window and is based on the grant period. This is often too short for adequate planning by the social franchisor. The key here is for the social franchisor to seek longer commitment terms from the donor.
The goal of every social franchisor is to achieve adequate scale and internal resources as a franchisor to begin to wean itself away from the continuing cycle of responding to grant proposals. Where a relationship has been established with social investors and donors, there should be a clear understanding that although funding requirements may become diminished over time, there will likely still be the need for some support for a lengthy period. Donors that do not enter the relationship with that understanding may instead prematurely see the social franchisor as successful and move their donations to another NGO or social franchisor at an earlier time frame than a social franchisor requires.
As with social franchisors, donors also have missions on how they want to employ their capital. Many, rather than donate to the overall mission of the grantee, want to target their donations to specific elements of the social franchise program. You will frequently see donors that don’t allow the donated funds to be used for overhead or administrative requirements and instead be “button holed” for specific and defined elements that the franchise system is trying to achieve. This has been one of the principle causes for problems in traditional NGOs, as it has required them to seek additional funding for other elements of their program, and in both a social franchise and an NGO it creates system stress that takes the focus of management off of its critical system mission.
As the social franchise system begins to expand, the normal and natural internal funding resources available from any franchise system should begin to limit the requirements for needed social investment and donations. As in any franchise system, these will naturally include franchise fees, royalties, income from supply chain sales, a la carte fees, and more. As these internal resources become available, with the need to continually seek outside funding, management can focus more of its time on the system’s mission, which is the essential goal of any franchise.
Successfully structuring the relationship between the social franchisor and the social investor and donor can also be beneficial to the funding organizations. Once scale and internal resources are the mainstay of the social franchisor, the achievements of the social investor’s focused approach reflect positively on the donor organization. With an increased competency within the social franchisor, to the extent the social investor has been seeking a return on its investment, at this point that possibility — not possible in a traditional NGO — is now reasonably possible.
Social franchisors and commercial franchisors . . . if there is a material difference, it rests in the mission. For the commercial franchisor, the purpose is making money and achieving a return on investment for its stakeholders. Social franchisors, while seeking sustainability and the opportunity not to require third-party funding, are mission-driven to the stated purpose of the organization: the delivery of high-quality medical services and prescription drugs or fresh water to consumers at the base of the pyramid for example. Losing sight of the social mission can reflect poorly on the social franchisor, its management, and the social investors and donors, if not properly managed.
At a point in time, as in any well-managed franchise system, the funding of a social franchisor may include traditional banks and other loan programs. Where the management of the social franchisor is unfamiliar with those more traditional approaches to business funding.
It is essential for management to consult with professionals that can effectively guide them through both the economics of the transactions and the legal and tax requirements that may become necessary within the structure of the organization.
What are funding sources for social sector franchises?
Different and sometimes blended funding vehicles are used to support each stage of a social franchise’s development. It is critically important that each stage of development be adequately funded in order to achieve key performance benchmarks before progressing to the next stage.
At a high level, social franchises use the following sources of capital to help them fulfill their missions:
Fees for goods and/or services:
Grants such as:
Many of the resources available to traditional NGOs are also available to social franchise systems. Below are further details about some of them.
Government Funding Agencies for Global Development
Following are the top government agencies involved in providing global aid, grants, and assistance. On each country/agency site will be information on the type of organization, development budget, focus on target countries, contact information, and more:
Private Philanthropic Foundations
Private foundations are playing an increasingly important role in funding international development, especially when bilateral and multilateral donor funds are restricted or restricting. Private foundations often support social enterprise development and may be interested in supporting the expansion of some of the social businesses in their portfolio through a franchise model. Following is a list that Devex (an international development news agency) compiled of the top ten private foundations according to their global development contributions. The Devex website (www.devex.com/news/top-10-philanthropic-foundations-a-primer- 75508) provides more information about each of the foundations and their total global development giving.
Corporate Philanthropists
Corporate philanthropy has been essential to the delivery of products and services to consumers at the base of the pyramid. Through grants and the access to significant human and other resources, corporate philanthropy has played an essential part of providing the necessary resources. According to a survey of Fortune 500 companies (http://fortune.com/2016/06/22/fortune-500-most-charitable- companies/), the top 20 most generous companies donated $3.5 billion in cash in 2015. Those companies are as follows:
Social Impact Investors
Impact investing seeks a return on investments that have the potential to make a significant and positively impact on society. Impact investments are made in organizations that seek to generate measurable social benefit as well as a financial return. Investors in this space are typically interested in businesses that address social issues such as health, education, poverty reduction, and environment. According to Investopedia the top five impact investors, based on assets under management, are as follows:
At a high level, social franchises use the following sources of capital to help them fulfill their missions:
Fees for goods and/or services:
- Debt and equity capital (usually via impact investors)
- Interest from investments
- Loans/program-related investments (PRIs)
- Tax revenue and government grants
- Membership dues and fees
Grants such as:
- Individual donations and major gifts
- Bequests
- Corporate contributions
- Foundation grants
- Diaspora funding
- Government grants and contracts
Many of the resources available to traditional NGOs are also available to social franchise systems. Below are further details about some of them.
Government Funding Agencies for Global Development
Following are the top government agencies involved in providing global aid, grants, and assistance. On each country/agency site will be information on the type of organization, development budget, focus on target countries, contact information, and more:
- Agence Francaise de Developpement (www.afd.fr/home)
- Australian Agency for International Development (www.internationalneeds. org.au)
- Austrian Development Agency (www.entwicklung.at/en/)
- Belgium Foreign Affairs, Foreign Trade and Development Cooperation (http://diplomatie.belgium.be/en)
- Canadian International Development Agency (www.international.gc.ca/ development-developpement/index.aspx?lang=eng)
- Danish Ministry of Foreign Affairs (http://um.dk/en)
- Dutch Ministry of Foreign Affairs (www.government.nl/topics/ development-cooperation)
- Finnish Ministry for Foreign Affairs (http://formin.finland.fi/public/ default.aspx?culture=en-US&contentlan=2)
- Gesellschaft für Internationale Zusammenarbeit (www.giz.de/de/html/ index.html)
- Greek Ministry of Foreign Affairs (www.mfa.gr/en/)
- Irish Department of Foreign Affairs/Irish Aid (www.irishaid.ie/)
- Italian Ministry of Foreign Affairs’ Directorate General for Development Cooperation (www.esteri.it/mae/en/ministero/struttura/dgcoopsviluppo/)
- Japan International Cooperation Agency (www.jica.go.jp/english/)
- Korea International Cooperation Agency (www.koica.go.kr/english/main. html)
- Kreditanstalt für Wiederaufbau (www.kfw.de/kfw.de-2.html)
- Luxembourg Ministry of Foreign Affairs (www.gouvernement.lu/maee)
- Millennium Challenge Corporation (www.mcc.gov)
- New Zealand Aid Program (www.mfat.govt.nz/en/aid-and-development/)
- Norwegian Ministry of Foreign Affairs (www.regjeringen.no/en/dep/ud/ id833/)
- Portuguese Institute for Development Support (www.anacom.pt/render. jsp?contentId=84460)
- Spanish Ministry of Foreign Affairs and Cooperation (www.exteriores.gob. es/Portal/en/Paginas/inicio.aspx)
- Swedish International Development Cooperation Agency (www.sida.se/ English/)
- Swiss Agency for Development and Cooperation (www.eda.admin.ch/sdc)
- U.K. Department for International Development (www.gov.uk/government/ organisations/department-for-international-development)
- U.S. Agency for International Development (www.usaid.gov)
Private Philanthropic Foundations
Private foundations are playing an increasingly important role in funding international development, especially when bilateral and multilateral donor funds are restricted or restricting. Private foundations often support social enterprise development and may be interested in supporting the expansion of some of the social businesses in their portfolio through a franchise model. Following is a list that Devex (an international development news agency) compiled of the top ten private foundations according to their global development contributions. The Devex website (www.devex.com/news/top-10-philanthropic-foundations-a-primer- 75508) provides more information about each of the foundations and their total global development giving.
- Bill & Melinda Gates Foundation
- Open Society Foundations
- Ford Foundation
- William and Flora Hewlett Foundation
- Children’s Investment Fund Foundation
- United Nations Foundation
- John D. and Catherine T. MacArthur Foundation
- Conrad N. Hilton Foundation
- Rockefeller Foundation
- Gordon and Betty Moore Foundation
Corporate Philanthropists
Corporate philanthropy has been essential to the delivery of products and services to consumers at the base of the pyramid. Through grants and the access to significant human and other resources, corporate philanthropy has played an essential part of providing the necessary resources. According to a survey of Fortune 500 companies (http://fortune.com/2016/06/22/fortune-500-most-charitable- companies/), the top 20 most generous companies donated $3.5 billion in cash in 2015. Those companies are as follows:
- Gilead Sciences
- Walmart
- Wells Fargo
- Goldman Sachs Group
- ExxonMobil
- Chevron
- JPMorgan Chase
- Bank of America
- Alphabet (Google)
- Citigroup
- Microsoft
- Merck
- Coca-Cola
- AT&T
- Target
- General Mills
- Pfizer
- Kroger
- PNC Financial Services
- Morgan Stanley
Social Impact Investors
Impact investing seeks a return on investments that have the potential to make a significant and positively impact on society. Impact investments are made in organizations that seek to generate measurable social benefit as well as a financial return. Investors in this space are typically interested in businesses that address social issues such as health, education, poverty reduction, and environment. According to Investopedia the top five impact investors, based on assets under management, are as follows:
- Vital Capital Fund
- Triodos Investment Management
- The Reinvestment Fund
- BlueOrchard Finances, S.A.
- Community Reinvestment Fund, USA
Developing a Social Sector Franchise System
How do I create a social sector franchise?
For a detailed description of each of the five stages, please see the PDF Developing a Social Sector Franchise System.
Stage One: Developing and proving the concept
Stage One is used to test the viability of the concept as a social business and refine the model until it is able to deliver desired social and financial results in one location.
Stage Two: Proving the replicability of the concept
During this stage of development, the concept will be tested in additional locations and further fine-tuned to optimize performance and prove consumer acceptance and profitability in a variety of settings.
Stage Three: Developing the franchise system
During Stage Three, the social franchisor’s concept and franchisor “offering” are designed, developed, and tested.
Stage Four: Expanding locally and nationally
Once the franchise system and support requirements have been developed, consumer acceptance has been validated, and financial sustainability of locations has been proven, debt and equity investment is used to expand the social franchise system on a local or national level.
Stage Five: Expanding Globally
Once the franchise system has expanded locally and nationally and the franchisor has gained the necessary experience required as a franchisor, the social franchise is now ready for a more global approach to expansion.
Stage One: Developing and proving the concept
Stage One is used to test the viability of the concept as a social business and refine the model until it is able to deliver desired social and financial results in one location.
Stage Two: Proving the replicability of the concept
During this stage of development, the concept will be tested in additional locations and further fine-tuned to optimize performance and prove consumer acceptance and profitability in a variety of settings.
Stage Three: Developing the franchise system
During Stage Three, the social franchisor’s concept and franchisor “offering” are designed, developed, and tested.
Stage Four: Expanding locally and nationally
Once the franchise system and support requirements have been developed, consumer acceptance has been validated, and financial sustainability of locations has been proven, debt and equity investment is used to expand the social franchise system on a local or national level.
Stage Five: Expanding Globally
Once the franchise system has expanded locally and nationally and the franchisor has gained the necessary experience required as a franchisor, the social franchise is now ready for a more global approach to expansion.
What type of business structures are used by social sector franchisors?
There is a range of business structures used in social franchising. The franchisor may be structured as a nonprofit, for-profit, or other type of structure that is specifically designed for a social enterprise, such as one of the following:
There are advantages and disadvantages to the nonprofit and for-profit approaches. The key advantages of structuring the franchisor as a for-profit entity are the following:
The key advantages of structuring the franchisor as a non-profit are as follows:
If there is a disadvantage to the nonprofit approach, it’s that the incentive for meeting brand standards and consumer needs is diminished to some extent, because the normal competition that comes into play when consumers make independent choices about where they shop, may be diminished. That lack of consumer focus may foster a lowering of brand standards. Also, because social franchising relies to a great extent on donations, any restrictions on donor funding or requirements by donors can have a negative impact on the business overall. This routine requirement, often factored into donor funding, can be extremely damaging within a social franchise structure.
- Social purpose corporation
- Low-profit limited liability company (L3C)
- Benefit corporation
- Cooperative
- Hybrid
There are advantages and disadvantages to the nonprofit and for-profit approaches. The key advantages of structuring the franchisor as a for-profit entity are the following:
- Incentives between franchisor and franchisee are better aligned, which drives performance at all levels of the system.
- The franchise system is funded as it would be in a commercial franchise from continuing fees and supply chain revenue.
- Donor funds can be used more efficiently to create direct subsidies for the poor through insurance and other programs so that more people can access products and services delivered by the franchise.
- As a consumer offering, there is a greater incentive for the local franchisee to meet brand standards and consumer expectations.
The key advantages of structuring the franchisor as a non-profit are as follows:
- The franchisor uses third-party grants and donations to cover its operating costs.
- The franchisee is subsidized, reducing some of the profit pressure on the business.
If there is a disadvantage to the nonprofit approach, it’s that the incentive for meeting brand standards and consumer needs is diminished to some extent, because the normal competition that comes into play when consumers make independent choices about where they shop, may be diminished. That lack of consumer focus may foster a lowering of brand standards. Also, because social franchising relies to a great extent on donations, any restrictions on donor funding or requirements by donors can have a negative impact on the business overall. This routine requirement, often factored into donor funding, can be extremely damaging within a social franchise structure.