Non-Profit Acquisition Expertise Needed - 3 Questions

May 27, 2020

by a searcher in New York, NY, USA

I am currently exploring an acquisition of a Non-Profit entity that has a focused product with substantial growth potential. The business was originally structured as a Non-Profit 25 years ago to take advantage of free access to space and tax benefits, effectively lowering the expenses of the company.

A few questions:

1. Does it make sense to re-incorporate the business as a B-Corp for profit, or retain the non-profit status and create a secondary for-profit entity?

2. How would it work to acquire a Non-Profit and use seller financing to pay out the owner? If you can't distribute profits - would you be able to do this? (ie - can you do an annual Consulting Fee?

3. How could you work with a minority investor to acquire the Non-Profit and be able to distribute returns to the investor?

Thanks for the expertise/help

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Reply by a searcher
from Harvard University in Fort Wayne, IN, USA

Curious to hear the thoughts of the lawyers in the community, but in my limited experience w/ the interactions between NPs and FPs, you need to be very careful w/ this. I've seen it go wrong from both sides, and in several instances, the value provided (product or service) was dramatically, negatively impacted.

If I was in your position, I'd create a new for-profit entity (or B corp if you're so inclined) and buy the assets from the non-profit with a very carefully crafted story to your customers on why the transition is happening. That way everything is clean on both sides of the transaction.

During DD, you should speak w/ some critical customers to see their reactions to the transaction. Also, be sure that the business would truly be viable in the new form, i.e. are donations outside the "business" side covering some of the fixed costs? And remind the non-profit team that they can't just pocket the money from the purchase!

Reply by a professional
from University of Minnesota in Minneapolis, MN, USA

There are a lot important tax and legal distinctions between "nonprofit" and "tax-exempt" organizations, in particular with regard to 501(C)(3) tax-exempt organizations. Unfortunately, most lawyers who work in the M&A space are not going to know much about these distinctions (myself included). Frankly, the selling entity probably has more to worry about, but there are certainly risks to a Buyer as well.

I'm an attorney, but I"m also an advocate of DIY legal work when practicable. In this particular instance, you're going to want to either 1) talk to an attorney with experience dealing with nonprofit or tax-exempt deals, OR 2) Do a LOT of research (and be sure to vet your sources properly).

Good luck!!

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