Don’t Fear the Acquisition Jump: How Nonprofits Acquire Private Businesses

As an executive at a nonprofit, you deeply and sincerely care for your organization’s mission. Fulfilling the mission is the pinnacle of your organization’s purpose. Whether that mission is employment services, environmental conservation or political advocacy, your mission is important and engaging to the community.

If you’re like other nonprofit executives, you consider your organization’s nonprofit status as an important piece of advocating for the mission. Carrying a 501(c)(3) status allows for distinct operations and means more money can go towards the mission. Therefore, you are understandably concerned about what acquiring a private entity could mean for that status.

Well, fear not; we are here to let you know that acquiring a private entity does not inherently put your nonprofit status at risk.

Below are three typical ways that an acquisition could play out in a nonprofit:

1. Mission-Related Acquisition: This is what occurred when our nonprofit client, Alphapointe, acquired Proformance Call Center. Alphapointe’s mission is to employ the blind. Proformance provides jobs for the blind and thus, the acquisition matched the organization’s mission. Alphapointe bought Proformance and the business is now run as part of the nonprofit. (Read more about this deal here.)

2. Unrelated Business Income: If the acquisition target does not substantially relate to the nonprofit’s mission, the business can still be acquired and would then become unrelated business income.  This income would be subject to taxes and must remain below a certain percentage of the organization’s overall revenue.

3. Subsidiary Ownership: Depending on many factors, one being that the acquisition target’s income exceeds unrelated business income thresholds, a nonprofit could purchase a private entity as a subsidiary. The subsidiary would be required to pay taxes but the nonprofit’s 501(c)(3) status would remain unchanged.

Don’t forget that your nonprofit status exists because of your organization’s mission not because of the space or sector you operate in. Acquiring a private business does not inherently put your nonprofit status at risk – each situation is different.

The three options above will look different for each nonprofit and for each acquisition target. We advise that you, first, seek out the knowledge of your attorney or tax accountant to gain insight into your organization’s specific situation.