Unlikely Alliances: How Nonprofits Can Acquire For-Profits as a Strategic Option

Nonprofit organizations are increasingly exploring the acquisition of for-profit businesses to advance their missions and diversify revenue streams. One example of this is the acquisition of news website Denverite by Colorado Public Radio in 2019. This move allowed CPR to expand its local news coverage and strengthen its digital presence by integrating Denverite’s in-depth community reporting. The acquisition not only preserved a valued local news source but also demonstrated how nonprofits can leverage strategic growth to enhance their impact and sustainability.

While acquiring a for-profit can offer nonprofits compelling new opportunities, it requires careful planning, thorough due diligence, and a clear understanding of legal and tax obligations. Below, we share valuable insights offered by Gene Takagi, Principal at NEO Law Group and a recognized expert in nonprofit law, into this complex process.

Strategic Considerations

Before pursuing such an acquisition, nonprofits should evaluate their primary motivations. Is the goal to generate revenue, advance the mission, or both? Understanding whether the for-profit’s activities align with the nonprofit’s mission is crucial, as motivation and alignment significantly impact the structure and success of the acquisition.

Investment and Fiduciary Responsibilities

Nonprofit boards must exercise due diligence, ensuring compliance with prudent investor rules and acting as fiduciaries. This involves assessing whether the acquisition is a prudent investment compared to other opportunities and confirming that any payment does not exceed the fair market value to avoid prohibited private benefits to the for-profit’s owners. Additionally, adherence to the Uniform Prudent Management of Institutional Funds Act (UPMIFA)[1] is essential, requiring consideration of economic conditions, tax implications, and the investment’s relevance to the organization’s charitable purposes.

Unrelated Business Income Tax (UBIT) Implications

Post-acquisition, nonprofits must be aware of Unrelated Business Income Tax (UBIT) issues. If the acquired business activities are unrelated to the nonprofit’s mission and are operated directly by the nonprofit, they may be subject to UBIT. However, if these activities are related and contribute significantly to furthering the nonprofit’s charitable purpose, UBIT may not apply. Proper structuring and understanding of these tax implications are vital to maintain tax-exempt status and ensure compliance.

Gene Takagi is a Principal at NEO Law Group, contributing publisher of the Nonprofit Law Blog, and has represented over 800 nonprofit organizations on corporate, tax, and charitable trust law matters. He is a recognized authority in nonprofit law, with publications in The New York Times, The Nonprofit Quarterly, and The Chronicle of Philanthropy, among others. Gene has also been a regular contributor to Tony Martignetti Nonprofit Radio since 2010.

Further Reading on Nonprofit Acquisitions:

• Nonprofit Law Blog: Can a Nonprofit Own a For-Profit? Can a For-Profit Own a Nonprofit?
• Lexology: Nonprofit M&A: Structuring the Nonprofit Acquisition
• M&A Community Portal: Mergers and Acquisitions for Nonprofits [+Checklist]