“What is that prospect worth?” Behind the closed doors of development offices, you often hear this question. Let me just get this point out of the way. As a human being, every person is of indescribable worth, intrinsically valuable and precious. This is true regardless of the person’s wealth. Even in those closed-door conversations, this is understood. However, what is really being asked is, how much can that person give away philanthropically?
In an attempt to answer this question, prospect researchers search for clues to the individual’s wealth from public sources. These might include real estate values, public company insider stock holdings, company sales, giving to other organizations, etc. Then, very often, a formula is applied to the discovered information to rate the prospect’s gift capacity. Formulae are passed from researcher to researcher like alchemical lore. As physicists strive to find the one theory that explains everything in the universe, prospect researchers are forever seeking the one formula that will unerringly calculate a prospect’s gift capacity.
It doesn’t exist. Of the formulae that are commonly used, they are often granted greater credence than they deserve. Hear me on this: every formula for estimating gift capacity yields a wrong answer. Even if you have some good information about specific assets, there are always assets you don’t know about and, more importantly, liabilities that are unknown.
That said, I use formulae as a preliminary way to rate prospects. The point of rating is not to precisely pin down a prospects capacity, but to prioritize that person appropriately for personalized contact and relationship building. A formula can give you a starting point for that prioritization. As the prospect grows closer to the organization, you will begin to learn more about capacity and interest through interaction with the person than can ever be learned through research.
Many formulae are based on this reasoning: if net worth is the totality from which someone makes gifts, gift capacity must be some proportion of that net worth. We can never know a person’s net worth, but it is certainly a relevant concept for rating. And helpfully, the IRS and others have done studies that help to shed light on how specific kinds of assets are distributed across net worth. You can read the most recent IRS study here: http://www.irs.gov/pub/irs-soi/08fallbulpw.pdf. For instance, the IRS says that, on average, households whose net worth is between $1.5 million and $10 million have about 25% of their net worth tied up in real estate. Those same households may have about 17% of net worth in publically traded stock and 9% in private company investments. You can see how this can help you extrapolate to what a person’s net worth might be if you have strong information about some specific detail of his or her assets such as property or insider stock holdings.
And now for MY favorite formula. Once you have made your best guess at a nice round and conservative figure for net worth, total philanthropic capacity is probably about 2-5% of that amount.
Note that, for most prospects, the asset you’re most likely to have reliable information on is real estate. However, if you have an insider, you’ll know something about stock holdings. If it’s a private company owner and you are able to estimate company value, you have useful information about closely held stock value (private company equity). Each of these bits of information gives you a different method for estimating net worth and gift capacity. And each of them will probably give a different answer. It would be nice if you could just average them all and come up with a single figure, but it’s not that simple. Remember, every estimate is more or less wrong. The researcher’s job is to take into consideration all that is known about the prospect and decide which calculation is least wrong. That becomes the basis for rating and prioritizing the prospect.
*David Lamb is a consultant with Target Analytics. You can reach him at email@example.com.