Codiligent has been a strong financial supporter of various non-profits over the years, and shares the motivation to make an indirect positive impact in the community (vs. just helping customers), but as a business broker I also have some insights on how to blend altruism with potentially helping make your business more valuable.
Some companies we work with have been very generous philanthropically but for a variety of causes that have little direct tie-in with their business and its mission, and sometimes this charitable giving is done fairly quietly. In other cases, we see giving that's publicly promoted through PR and is more focused on causes with a tie-in to the business' mission. There's not a right or wrong way to do this, but a few high-level thoughts to consider for business owners developing a giving strategy:
1. If corporate giving is fairly quiet and isn't likely to have much of a direct PR / marketing benefit related to the company's customers, then many business buyers will be willing to add-back that expense when the financial statements are re-cast since it is discretionary and is not having a material marketing benefit. An example of this would be a manufacturer who has nationwide customers, and makes contributions to a local homeless services non-profit, or a local little league team. While customers in other areas may think it's great that the business is giving back to the community, this won't likely have much of an impact on their decision to do business with the company. Consequently, there is probably no downside when it comes to business valuation with this type of giving.
2. In contrast, a business with local B2B customers that sponsors non-profit industry association events, contributes to the art museum, or supports a little league team might get a very real marketing benefit from such activities given the fact that customers are local and see / experience the benefits from the company's giving. In such cases, being able to add-back this giving when re-casting financials becomes a bit more fuzzy. Yes, the giving was discretionary, but did it have a marketing / P.R. benefit that contributed to attracting and retaining customers? If so, then it might not be a legitimate add-back and thus it potentially may decrease your business value by multiples of every dollar you give.
3. Many small businesses are structured as pass-through entities (LLP, LLC, S Corps) where the profits are passed through to the shareholder who pays taxes. So, one way to decrease the likelihood of such giving adversely impacting business value would be not to make charitable contributions through the business, but rather as an individual. A business buyer may still learn that you have made such contributions and might feel it is necessary to continue those expenses which might impact what they are willing to pay, but this is less likely if it's not giving being done by the company itself.
4. If there is a desire to do giving through the business, rather than as an individual, regardless of whether or not buyers will agree to add back the expense, some suggestions to consider:
- What non-profits can you support that will be recognized by your current and prospective customers and employees?
- How can you get press and public recognition for the giving that increase the marketing benefit?
- Is your business a significant enough donor that the non-profit should be making you or one of your staff members a board or committee member which further increases ongoing recognition of your company?
- Are there non-profits that you can support where there are board members or key donors that are significant prospective customers that might be more likely to do business with your company as a result of the shared support of the non-profit?
- Can you do more creative ways of giving, that have a PR benefit? For example, offering a challenge to match other donations, or sponsoring particular events.
- Think about whether it is better to make larger donations to a few non-profits or smaller donations to a larger number of organizations? This often also depends on the size of the non-profit. A $20,000 gift could be considered a major impactful donation to some non-profits, but not for other larger non-profits. Is there a benefit to being able to share that your company supports a larger number of non-profits?
- Does it make sense to tie giving to sales or profits (i.e. the company will give 1% of profits) on an ongoing basis or would you rather have it be a one-time gift?
It's wonderful to see so many companies and their founders trying to figure out ways to improve society beyond creating jobs and the products and services they provide to customers. With a bit of thought and planning, such giving can be good for the bottom line and business value.