By Jack Cumming

Imagine a for-profit corporation that covenanted to act like a nonprofit. What would that mean?

Aside from their tax exemption, nonprofits assert that they put mission, the best interests of their beneficiaries, first. The presumption is that the alternative is investor enrichment.

A for-profit, however, can covenant likewise to put purpose, the best interests of its customers, first. Of course, for-profit investors, just like nonprofit debt providers, have a reasonable expectation of a fair – though not excessive – return on investment.

Any material differences in these forms of business organization reflect the values of the corporate leaders. A close examination suggests that the similarities are far greater than the differences. Many nonprofits, particularly in the senior living industry, might be better able to serve their mission by converting to a for-profit business structure while covenanting to put principle before aggrandizement.

Why For-Profit?

For starters, nonprofits lack access to equity capital, which inhibits their adaptability and flexibility. In senior housing, for instance, a for-profit can give cooperative ownership to residents. That opens a source of capital that can be used to extend the mission to more people. Moreover, ownership for aging adults can enhance their life experience; give them a sense of self-worth, and better accomplish a service mission.

In addition, covenanted for-profit corporations pay their fair share of taxes to support the commonwealth. Nonprofits avoid taxes though they provide a vaguely quantified public benefit. Meeting that financial commitment to local governments can help senior living find a welcome. It also allows seniors to feel that they have contributed to the locality in which they live.

Lastly, for-profits have attractive options for enhancing their efficiency and effectiveness through consolidation and other business arrangements. Nonprofits can do likewise though not with the same facility as that which characterizes the for-profits.

Distinctions of Business Structures

Almost all enterprises, whether they are governmental, nonprofit, or for-profit, require some investment before they become economically sustainable. With government enterprises, those investments are from the public treasury, and the users of the funds are accountable only to the government. Nonprofits typically depend on donors or government grants and accountability is loose.

With private enterprise, the investment is voluntary, and users of the funds are accountable to those who provided them. Nonprofits exist in the space between government and private enterprise. They are taxpayer-funded by their tax exemptions and donor-funded through philanthropy, at least until they become self-sustaining. They are accountable only to government, or in very rare instances, to donors or customers.

Because of this heightened awareness of accountability, private enterprises – for-profit businesses – are often perceived as more responsive to changing market and cultural circumstances, as faster-paced, and as more efficiently operated than are their nonprofit and governmental counterparts. Of course, some see these qualities as insensitive toward those served, and some businesses do seek to be self-aggrandizing, but that need not be the case. By covenanting to higher standards, covenantal for-profit enterprises can combine the advantages of equity ownership with nonprofit principles.

Covenantal For-Profits

This may seem complex, but it’s not. Common sense tells us that there is little difference in the financial needs of enterprises whether they are governmental, nonprofit, or for profit. There are differences in whether funding is voluntary or coercive.

Imagine that you want to open a senior living residence. You find an investor (or donor or government grant) to allow you to buy the land and to build on it. That process might take, say, 18 months during which the senior living business has no revenue, but you likely are drawing an income and you are spending in anticipation of opening. Once you open, it may take a year or two until all residences are filled and the fee income from residents is enough to cover expenses.

Those costs during the startup phase are a capital investment regardless of whether the funds come from investors (for profit) or from donors (nonprofit) or from the government. After the business is self-sustaining the funds come from customers – residents in the case of senior living. The capital providers – investors, donors, or government – are entitled to a fair return consistent with the expectations that led them to advance the funding. The resident-customers are entitled to fair value consistent with the funds that they are entrusting to the enterprise.

This premise of fair returns and fair customer value are the principles of a covenantal business organization. What constitutes fairness is determined by the marketplace. If the senior living enterprise is more luxurious than what the local market can afford, it may falter and fail. That’s also true if the enterprise is too rudimentary to attract residents.

A covenantal enterprise can distinguish itself by promising to forego unjust enrichment. That principle has been implicit in the nonprofit mythology. The covenantal concept is to define positive principles; to establish reasonable metrics for investment returns and fair value; and then to judge enterprise performance by actions, not words.

Back to Senior Living

Over the past several decades, senior living has been evolving from a charitable, paternalistic undertaking toward becoming a business dedicated to empowering older adults to live fulfilling lives in concert with one another. We know that for-profit organizations are becoming a growing force within senior living.

Would today’s nonprofit senior living leaders behave any differently, or have lower ethical standards, if the enterprises they lead were taxpaying instead of nonprofit? Likely not. Would they be better able to realize their service mission? Perhaps. Now is the time to consider whether mature nonprofit senior living businesses should consider converting to covenantal for-profit business models.