Rating Prospects

Major Areas of Consideration

1. Known philanthropy
2. Known assets
3. Known and estimated income
4. Known and estimated obligations
5. Life cycle issues

A rating must be in a range which reflects these concerns:

• If the rating is too high fundraisers will be repeatedly disappointed and lose faith in the research.
• If the rating is too low your organization will not ask for, and will therefore not receive, a gift which it needs and which the prospect can afford to give.

Define What is Being Rated

One of the most frequent problems with ratings is lack of clarity about what a rating assesses, whether it applies to annual or major giving, and what constitutes a major gift.

The following estimates and considerations are for major gift estimates, based on assumption of a five-year pledge period.  They are for absolute capacity,that is:  not “probable next gift to organization x” (which requires assessment of closeness to organization x).

1.  Known Philanthropy

• The bottom of a rating range should not be lower than the prospect’s largest known gift (either direct, or through a personal foundation).  For example, if you know that John Doe gave $1,000,000 to his alma mater, then clearly Mr. Doe has (or has had) capacity for a gift of at least $1,000,000.
• If a prospect has no known significant philanthropy it may indicate inexperience with philanthropy (in which case a very high ask may be particularly off-putting).
• Alternately, it may indicate a high degree of concern for privacy, which should impact the nature of the proposal offered to the prospect (e.g., this would not be an ideal candidate for naming a building).

2.  Known Assets

Consider whether assets are liquid. 

A family business may be worth $10,000,000, but it is extremely unlikely that a prospect will sell a business in order to make a gift.  If, however, you are aware of a pending sale of the business the value of the business becomes more pertinent.  Information about a privately held or family business is usually most useful in making an estimate of income.

Insider holdings may generally be considered as giftable assets, although in some cases there are restrictions about how and when high-level insiders may dispose of certain kinds of stock classes.  With no better indicators, then 5% - 10% of insider holdings can be considered the bottom of the major gift rating.

Real estate should be considered in two categories. 

• In the first category are those prospects who own their home and perhaps adjoining land, or second home, possibly a third home.  In this case, the assets are not liquid and giftable in practice (most people won’t sell their homes in order to make gifts). 
• Recent downsizing of living conditions may indicate decreased income, or may simply indicate changed needs (e.g., the eight children have grown up and moved out, and the prospect no longer wants to maintain a 10-bedroom house). 
• In the second category are those prospects who clearly own income-generating property, such as apartment buildings, commercial property, and mineral rights.  As with the family business, this information is most useful in estimating income.

Other assets are often indicators of disposable income (and likely giving interests).  For example, a collector who is able and willing to spend $1,000,000 on a piece of art is likely to be able to spend that amount on a major gift, or might have pieces of art which could be donated.

3.  Known and Estimated Income

Major gift capacity can be calculated as 3 – 5% of annual income, multiplied by a five year pledge period,i.e., 15 – 25% of annual income.  If annual income exceeds $1,000,000 use 5%, as there is clearly ample disposable income.

4.  Known and Estimated Obligations

Obligations rarely reduce actual gift capacity, but may do so, and are very likely to affect timing for anask. 

Consider that a large home mortgage may simply mean taking advantage of cheap rates and the tax advantages of a mortgage.  However, if the prospect tends to live high – large home, flashy cars, more active socially than philanthropically – it is wise to be particularly conservative estimating giftcapacity.

Small liens – tax obligations or small claims court awards – should be considered first in light of the prospect’s business; a landlord, for example, is likely to have a number of these appear in public records and it is unlikely to reflect on personal reliability.  It is important to note, however, if it appears that the prospect is particularly litigious (which may indicate that he or she difficult to deal with), or has a large number of undischarged debts (which may indicate reluctance to fulfill commitments).

Significant pending legal action suggests that income is likely to change substantially in the near future.  Use the bottom of the range, and make a strong recommendation that an ask be either immediate, or post poned until theaction is settled.

5.  Life Cycle Issues

• For a prospect over 70, assets may be weighted more heavily.  Recommend a planned gift strategy with a bequest specifying a percentage of the estate rather than a dollar amount.
• Prospects under 40, unless they are extremely wealthy (on the Forbes 400), are not likely to think of themselves as being as wealthy as they are; use the lower end of ranges. 
• Consider family commitments:  a prospect with four children in private universities who has a new home may still be rich, but because of cash flow may not feel wealthy.
• When a prospect is self-made and has come from a family without resources, he or she may well be supporting parents, siblings and possibly even cousins and extended family.  This is particularly true for foreign prospects and immigrants.

General Notes

Resources for considering whether to adjust your percentages are the Giving USA report produced by AAFRC and demographic data produced by the IRS and the Census Bureau.