Public and private non-for-profit corporations undergo valuations on a regular basis to establish new lines of credit and help facilitate M&A negotiations.
As is the case for many valuations, accuracy is only possible when working with an independent appraisal firm that specializes in nonprofit entities. Below are some considerations that will help you understand the importance of these non-for-profit valuations.
Merger Considerations
There are times when a nonprofit organization has grown significantly or their mission evolves or has changed direction. At this juncture, it might make sense for a nonprofit to merge with another not-for-profit organization or even a private corporation.
Before this transaction can take place, the nonprofit merging into or being absorbed by another entity must be thoroughly evaluated. This nonprofit valuation process protects all parties and ensures none are left with an unexpected tax liability.
General Asset Reporting
The Internal Revenue Service (IRS) has very strict guidelines surrounding nonprofit organizations. In order to keep their classification, nonprofits must report transactions in a timely and specific manner. While virtually every transaction gets recorded somewhere, these transactions may require a valuation overview before or after IRS reporting:
- Cash donations exceeding $10,000
- Non-cash donations exceeding $5,000
- Estate, trust, and legacy donations
- Privately owned stock and option donations
Internal Reorganization
It is not uncommon for a nonprofit to divest itself of a department or chapter. The section being removed from the organization may be moving on to join a national or international division of the same charity. Other times, one sector simply grows too large for the organization or chooses to pursue and develop a new offshoot of the originating nonprofit.
Whatever the reason for the reorganization, a nonprofit valuation is required. This data collection will help both organizations properly market themselves and keep their financial affairs in order for tax reporting purposes as well as general financial transparency.
Importance of Nonprofit Valuations
Understanding when a nonprofit valuation is useful is not the same as understanding the importance of obtaining an expert nonprofit appraisal before a qualifying event. In the spirit of fairness and due diligence, the valuation protects both parties from future litigation should any concerns arise after the transaction. The independent valuation also provides crucial feedback about the current state of financial affairs.
Depending on the circumstances and the type of nonprofit, the valuation process will focus on a specific need or pain point. The specific approach to the valuation helps orchestrate an objective outcome, whether it be a cash flow evaluation or a general market value determination.
Nonprofits are under constant scrutiny by a number of different groups, often with competing interests. The benefits of conducting valuations when appropriate for nonprofits are obvious. Moreover, the consequences for not procuring a valuation can be disastrous. The IRS can be rather unforgiving over the smallest oversight or omission. There is no reason to take a chance of unnecessary conflict with this intimidating agency.