Acquisition of a Nonprofit
- 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.
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1. Acquisition of a Nonprofit
From: "James Rosenberg" <jrosenberg@...>
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?
Founder, Executive Director
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
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
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
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
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