I regularly come across Charity Annual Reports for UK-registered charities, where one or more commercial trading subsidiaries have been set up in the past. But their financial performance has been poor over time. Eventually, the charity trustees decide to discontinue the commercial subsidiary or subsidiaries altogether.

The reasons for poor commercial performance many be varied and include a lack of adequate financial investment (seed funding to develop products, services and markets), a confused or superficial business strategy, lack of subsidiary board expertise (appointing charity sector experts alone isn’t helpful). Or the subsidiary’s customer demand may be especially vulnerability to ‘black swan’ external events, such as government-imposed lockdowns during a pandemic. 

Another important contributor to commercial poor performance is treating the commercial subsidiary like the parent charity, in terms of risk appetite, performance incentives or strategic planning generally. Commercial customers are nothing like charity funders or charity beneficiaries and will require different segmentation and a different user interaction experience.

Finally, charities should strongly consider income stream diversification, including from commercial subsidiary sources. But be realistic about the resource commitment required.

Competitive Scope Differences

If the charity is strongly differentiated from its rivals, or operates as a near monopoly in its service provision, yet the commercial subsidiary operates in a highly competitive, commodity-like market, then the Strategic Plans for both ought be quite different, for each to be successful.

Commercial Entity Divisions

The commercial subsidiary may have one or more operating divisions within it. If the later, the markets and customers for each trading division may be both varied and non overlapping. For example, a commercial publishing division, a commercial space tenancy (lettings), commercial events management and commercial online merchandising.

Different Strategic Plans

It’s likely that a prospective charity funder will review the charity in detail and if it discovers commercial trading subsidiaries, the funder will want to be assured that its funding for beneficiary services won’t instead get used to support commercial subsidiary development. The Charity Commission will also want to see commercial subsidiary seed funding by the parent charity only from unrestricted reserves and only when supported by a relatively low risk business case, showing a high chance of financial returns on that commercial investment.

One way to provide that funding partner assurance is to engage a strategy expert to do the relevant strategic analysis and produce a Strategy Plan for the commercial entities, not just the charity entity. That Plan can be shown to the prospective funders (and the charity regulator, if necessary).

Leveraging Parent Charity Options for Commercial Success

Finally, in the commercial subsidiary Strategic Plan, it makes sense for the commercial entity to leverage any options held by the parent charity that can be commercialised for financial gain, without tarnishing the reputation of the parent charity in any way. In the commercial business plan, such options are a source of competitive advantage.

An example might be to leverage some intellectual property held by the parent charity (as a real option) but not yet monetised, or explicitly valued on the balance sheet.  Heritage charities may have famous founders associated with them. Commercial merchandising or research access (to the Charity’s heritage asset collection) can be arranged, as a commercial service. Data products can also be developed as a commercial pay-per-view service.

Simon