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Acquisition of a Nonprofit

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  • jim@benetech.org
    Yes, James, I did this 4 years ago in a $5 million transaction. We sold our Arkenstone non-profit social enterprise to a for-profit which merged it with
    Message 1 of 3 , Oct 31, 2004
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      Yes, James, I did this 4 years ago in a $5 million transaction. We sold
      our Arkenstone non-profit social enterprise to a for-profit which merged
      it with several other companies into a single entity doing business in
      the disability technology field.

      Priya is not correct that it can't be done, but it has to be done in a
      way that honors her point that "those assets must be held for the public
      good." The acquirer had to pay for the assets, and the payments had to
      stay in the nonprofit sector. We had a purchase agreement, an
      independent valuation assessment (to ensure that the acquirer was paying
      a fair price), and we needed to have the transaction reviewed by the
      state attorney general office.

      We had to make the case to the AG's office that this transaction truly
      was in the public's interest, since the assets indeed belong to the
      public. We took the payment for the social enterprise and used it to
      start several new nonprofit social enterprises, which was our proposal
      to the AG's office. And, four years on, I think that's what happened.

      The structure was that of an asset sale. Our 501(c)(3) sold its main
      asset, the business, and received the cash.

      Jim Fruchterman
      President & CEO
      Benetech

      480 California Ave, Suite 201
      Palo Alto, CA 94306 USA
      (650) 475-5440 x-106

      Fax: (650) 475-1066
      jim@...
      www.benetech.org

      The Benetech Initiative - Technology Serving Humanity
      A nonprofit organization


      1. Acquisition of a Nonprofit
      From: "James Rosenberg" <jrosenberg@...>

      Message: 1
      Date: Wed, 27 Oct 2004 16:07:22 -0400
      From: "James Rosenberg" <jrosenberg@...>
      Subject: Acquisition of a Nonprofit

      I am exploring the viability of identifying a company to acquire my
      social venture and roll it up as a subsidiary company. Has anyone had
      any experience with this or any knowledge about this?



      James Rosenberg

      Founder, Executive Director

      Adopt-A-Classroom
    • Allen R. Bromberger
      James: I agree with both Jim and Priya s replies. I just want to warn you that the issues and the structure of the deal can differ greatly depending on your
      Message 2 of 3 , Nov 1, 2004
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        James:

        I agree with both Jim and Priya's replies. I just want to warn you that the
        issues and the structure of the deal can differ greatly depending on your
        tax status and that of the buyer.

        As Jim and Priya noted, a 501(c)(3) org cannot simply shift its assets to a
        non-501(c)(3) purpose or owner; it must receive fair value for them (an
        appraisal is the best way to establish fair value) and the net proceeds
        after settlement of applicable liabilities must remain dedicated to
        501(c)(3) purposes, usually by transferring the proceeds to an org with
        purposes that are the same or similar to those of the seller.

        If the seller is NOT a 501(c)(3) organization, valuation is a bit less
        important, but there may still be investors or creditors who have a claim on
        the assets and they must be treated fairly or you'll have a problem.

        These transactions are typically done as asset sales. It's often just
        simpler and cleaner to do it that way. But when you have two 501(c)(3)'s
        involved, a merger or consolidation of the two companies may make more
        sense.

        In almost every case where the seller is a nonprofit corporation or a
        charitable trust - or where two nonprofits merge - the state attorney
        general's office will have to review the entire transaction and approve it
        to make sure that it is consistent with the public interest and that no
        undue benefits are accruing to private parties in a way that would be
        inconsistent with the non-distribution requirement that applies to every
        nonprofit. FWIW, this also applies to the sale of substantial assets even if
        the nonprofit will remain in business. Many state attorney generals offices
        will review a transaction beforehand to make things easier, but be careful
        with that. Don't go in until you have thought things through, conferred with
        legal and financial advisors, and are really ready to discuss the matter.
        After all, they are still the cops, and anything you say...

        It is the state attorney general's office which normally takes the lead in
        reviewing such transactions, and the IRS takes a second seat (if it
        participates at all, which it usually doesn't unless you have big assets and
        request a private letter ruling on the transaction.) But remember that you
        ultimately have to report the transaction to IRS, so you need to do this
        carefully to avoid any nasty surprises. It is not something to rush through
        blindly.

        In that regard, I strongly advise keeping your board closely involved, and
        have them approve things as you go. There will be points of decision along
        the way where there is no obviously "right" or "wrong" way to go, and you
        will almost certainly face tradeoffs or business decisions that are properly
        within the purview of the board. In these cases, following the proper
        corporate formalities is good practice and good protection against
        liability, too.

        The one thing I would stress above all else is that a good purchase and sale
        agreement (or a good merger agreement) that takes all these factors into
        account - and contains the necessary warranties, representations and escape
        clauses - is essential. If it is a friendly transaction, reaching agreement
        shouldn't be hard. And if you hit a problem or a snag, you'll be VERY glad
        you have a good agreement in place.

        I'd advise you get the help of an accountant and a lawyer as you move
        forward. If you can't afford a lawyer, you may be able to get one pro bono -
        take a look at our web site www.powerofattorney.org for a map of local
        programs that can connect you with pro bono help.

        Sorry I can't help with with pro bono accounting advice. Maybe in my next
        life. :-)

        Allen Bromberger
        President
        Power of Attorney, Inc.
        330 Seventh Avenue, 19th Floor
        New York, NY 10001
        212-643-6242
        www.powerofattorney.org
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