Business Models: Part 1 - Social Enterprise - Giving back to the community

Early years private, voluntary and independent (PVI) providers come in multifarious forms. Government figures show that 30 per cent of the country's 16,700 nurseries are being provided by the voluntary, non-profitmaking sector (about 34,000 when creches, after-school clubs and other types of formal childcare are taken into account). Of these, about 2,100 are social enterprises, and the number is likely to be increasing.

According to Social Enterprise UK, the movement is fast-growing, with a third of all social enterprises three years old or younger in the UK. What's more, 38 per cent of social enterprises are led by women, compared to 19 per cent of SMEs, while 91 per cent of social enterprises have at least one woman on the leadership team.

- What is a social enterprise?

The Government's definition of a social enterprise is 'a business or service with primarily social objectives whose surpluses are principally reinvested for that purpose in the community, rather than being driven by the need to maximise profit for shareholders and owners.'

Many use standard business models as their legal form, but include a clear social mission in the company's governing documents, while reinvesting the majority of the profits.

The most common forms of social enterprise are companies limited by guarantee or shares, community interest companies, group structures with charitable status and industrial and provident societies. There is no single social enterprise regulator; rather, regulation depends on the business model used.

Limited company with charitable status

The London Early Years Foundation (LEYF) is the third largest nursery group of any kind in London. It is a company limited by guarantee (CLG) (ie, members or guarantors share liability, not shareholders) and also has charitable status due to its history, which allows for fundraising and allows exemptions from standard charges such as business rates as well as donations. The organisation was set up in 1904 to combat the rise of maternal and infant mortality rates within Westminster.

Neil Fenton, director of finance and social investment, says, 'In 2005 the social enterprise notion came into our thinking. At that point we were about 75 per cent reliant on local government funding; it wasn't the safest place to be. June (O'Sullivan, chief executive) set about changing the thinking. We started thinking much more about childcare as a business than we had done previously.'

The organisation is governed by a board of seven unpaid trustees, including an accountant and a social worker. Their role is to agree and help implement the overall strategy with Ms O'Sullivan.

LEYF has 28 nurseries across seven London boroughs, with 95 per cent of the income generated from private funding from parents, and the rest made up in subsidies from local authorities.

However, unlike a private business, the company reinvests most of its profits. Last year, the business had a turnover of £10.4m (it is forecasting £12m for 2014-15) and Mr Fenton says the company reinvested nearly half a million pounds. This went on subsidising places, with 46 per cent of children subsidised out of the total intake of 3,000 children.

Profits are also put towards paying staff salaries - above-average wages for 40 apprentices, many of whom have been not in education, employment or training (NEET) - and providing training. A small proportion also goes towards social impact reporting.

The model enables LEYF's core aim of establishing high-quality nurseries 'in parts of London where a nursery wouldn't exist at all were it not for LEYF's intervention' through having freedom over subsidies.

Its ambitious expansion plans - to acquire 10 nurseries across the capital in three years - are being financed with a £1.2m loan from social enterprise venture fund Bridges Ventures and Big Issue Invest, as well as small grants from companies such as the Social Business Trust.

But it is the strength of the business, rather than the ethos, which has attracted the investment. 'We are competing with private companies so you need to have a good business model. We don't get special treatment because we are a social enterprise,' Mr Fenton says.

Limited company and social enterprise as separate entities

Acorn Childcare started as a private company limited by shares (CLS) in 1989. It has since expanded to nine nurseries, three of which are on school sites, while it also runs creches, holiday play schemes and out-of-school clubs.

The company is divided; the original company houses about two-thirds of the nurseries, while the new social enterprise, which is CLG, has about a third and includes a training company. This is expected to become a 50:50 split by the end of next year after the nursery opens its 11th site, says founder Zoe Raven.

'The original company was set up 25 years ago this year,' she says. 'It became three nurseries and then I expanded to school sites. I started to become more interested in social enterprise - working with schools, there was a stigma being in the private sector and I felt uncomfortable about making money from childcare. I only wanted to put fees up because I needed to. Now, we have nurseries with long waiting lists; we could increase the fees much higher but we don't.'

The dual structure has its benefits when it comes to raising capital. 'Borrowing is trickier as a social enterprise,' says Ms Raven. 'We have to borrow against our original company because that is where the assets are. Social enterprises are less likely to have these assets in the first place as banks won't lend as much - even charity banks. But this is the benefit of having both side by side.'

Business benefits include much greater freedom over decision making. For example, employees will soon be offered five training days per year, which costs two per cent of the group's annual income because the nurseries are closed.

Ms Raven adds, 'We have nurseries that other groups would have closed, but which we have kept open because there is a social need. We have reinvested and they are now sustainable. We are able to make non-commercial decisions to hang onto a nursery that isn't making money.'

A community interest company

Both CLS and CLG can also be incorporated as a community interest company (CIC). CICs are for people wanting to set up social enterprises for the public good, and to overcome problems associated with using private models, such as non-charities finding it difficult to ensure that their assets are dedicated to public benefit.

CICs can be formed for any lawful purpose as long as this is a community benefit, which is a much wider remit than a charity is allowed. CICs require creation of a 'community interest statement', explaining the intended social activities and the community they are intended to serve, and an 'asset lock' - a legal promise stating that the company's assets will only be used for its social objectives, and that sets limits to the money it can pay to shareholders.

Oaklea Montessori CIC is a flagship Montessori nursery, featuring in the movement's community manifesto 2012-15 as an example of how to go back to the original Montessori ethos. Caroline Allen, Oaklea director and manager, used to be a sole trader.

She says, 'I was successful in bidding to create a Montessori children's centre nursery and wanted a business model that would fit that. My first thought was a charity, so I met some potential trustees, but I had a hunch they didn't understand what we were trying to do. A social enterprise business advisor gave me the confidence to go for it.'

A crucial part of the process has been getting the community interest statement, which is submitted to the Regulator of Community Interest Companies.

She says, 'We were advised at the beginning not to include geographical content, so we were not limited if we wanted to expand, and we've now opened two settings on rented sites in Essex.

'The only grey area is that everyone knows what a charity is, but we have to explain to people that we are run by unpaid directors.'

Such is the importance of the CIC and Montessori ethos that 'about a third' of the recruitment process is about ascertaining candidates' level of commitment to these principles.

Ms Allen says, 'It isn't an easy road - we have chosen to provide a service to all families including the most vulnerable. I will never be able to retire on the profits as there is nothing else in the bank.'

But she adds that she prefers this method of working 'absolutely without a doubt. Montessori started with the most vulnerable in Rome over a century ago, and we are just trying to do the same. I call it Montessori full circle.'

The next article in this series, on 20 October, will cover co-operatives and employee ownership.