Not For Profit Valuation

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email: david@myaacg.com
 
David Hahn, CVA, ASA, MAFF, CM&AA, CCIM, MBA


NOT-FOR-PROFIT VALUATION




Whether converting into a profit seeking organization, transferring assets across operating segments or
geographic jurisdictions, annual audit requirement, tangible and intangible assets reporting related to IRS Form 990, or retaining a tax exempt status, not-for-profit organizations may require a valuation. Not-for-profit organizations, sometimes called non-profits, operate in a unique regulatory environment and have different goals and stakeholders than for-profit entities.

A valuation can provide the critical information needed by management to make important operational decisions as well as comply with legal and regulation requirements.

Some of the sectors within the Not-for-Profit Industry that may require a valuation to be performed include:

Education (Schools, Colleges & Academies): From sophisticated laboratory equipment to leasehold
improvements, and other non-monetary contributions, donations to educational organizations need to be valued so that the organization’s accounting records are accurate and the donor receives the proper tax deduction when appropriate. In additional to tangible donations, there are laws governing how federal grants and similar contributions need to be balanced financially.  Institutions of higher education receive contributions in the form of non-monetary assets. The underlying value must be established by the donating party to support the charitable contribution deduction. Often the school contracts for an independent appraisal, even when the donor’s value is provided, in order to support the value on the school’s balance sheet.  Federal government grants are sometimes tied to the utilization of certain assets. These assets may be used for specific research or development in select programs.  The asset value/basis and related depreciation may determine an expense reimbursement within the grant provisions. In some instances, intellectual property is created with non-profit funds and research. The sale or licensing of these intangibles to other parties – universities, government agencies or private/public companies – must be premised on sound and supportable valuation procedures.  The rights of one (or more) school to the value of created intangibles may be the subject of significant litigation. Again, valuation experts and testimony are often required to resolve these disputes.

Charitable Organizations: Establishing Charitable Remainder Trusts (CRT) often entails estate and income tax considerations, the value of stocks and other contributed assets should be appraised.  The most common appraisal is to support the value of a donation of stock or assets to a charity.  The IRS requires that certain donated property valued above $5,000 be supported by an appraisal and a signed Form 8283.  Major shareholders of a selling business often donate a portion of the stock to a charity prior to the sale of the business. The value of donated stock reduces the taxable portion of the proceeds to be received. In order for this transaction to pass IRS scrutiny, the shares must be donated to a charity prior to the consummation of a signed purchase agreement.  For estate and income tax planning purposes, Charitable Remainder Trusts (CRT) are often established by contributions of real property or other income producing assets. The value of assets contributed to the CRT must be established.

• Foundations: A valuation of a foundation is critical in securing and maintaining preferential tax treatment. If a foundation is bound by certain Treasury laws, it’s important to find out if it is required to distribute a specific percent of the total assets on an annual basis. A valuation is vital in order for an organization to know how much it has to distribute.  Treasury regulations require certain foundations subject to favorable tax treatment to dispense a certain percentage of asset value each year. A well-conducted valuation may be required to establish the average annual value of foundation assets and the amount of the required distribution.  The receipt of property by a foundation also triggers a current appraisal. The foundation balance sheet is restated each year at market value.

• Healthcare: As a healthcare provider organization converts to for-profit status, there are unique challenges to restructuring. Depending on which jurisdiction the organization is based in, they may be required to complete a not-for-profit valuation before converting to for-profit status.

  • Religious Organizations

  • Trusts:  In addition to the CRT, there are other types of trusts created for estate planning purposes.  Assets placed in these trusts must be appraised. In some cases, private company stock must be revalued on a yearly basis via an independent appraisal. Minority interests in these assets that are transferred may be discounted from prorata value. This gifting or transfer procedure allows taxable value to be removed from an estate.
    The trustee of a trust has a fiduciary duty to the beneficiaries of the trust. When required by the
    terms of a trust, asset and/or income distributions may be based on current value.

    The transfer of assets from a non-profit entity may be subject to Federal income tax. A tax is imposed if the fair market value of the assets transferred is in excess of the consideration received in exchange. In addition, an excise tax under Section 4958, I.R.C. may be imposed to beneficiaries of “excess benefit transactions”.
    When a non-profit organization sells assets or merges with a for-profit entity, the assets must be valued. This is particularly important in the case of an asset sale to an insider.

    We can help our clients for valuations of tangible and intangible assets related to IRS Form 990 requirements.


    Valuation Approaches for a Not-For-Profit Organization
    Depending on the goals and objectives of the organization, it’s important that the right approach is used in performing the valuation. Whether conducting a not-for-profit valuation based on the value of comparable entities in the market, or analyzing income or cash flow, there’s a wide range of methods to accurately determine the fair market value.

    The following represent a few of the more common approaches that used during the valuation of a not-for-
    profit organization:

    • Income Approach: This approach focuses on assessing the present value of future cash flow to be generated by the entity. Two primary techniques are the Capitalization of Earnings Method and the Discounted Cash Flows Method (“DCF”). The Capitalization of Earnings Method requires applying a capitalization rate to the projection of a single period cash flow. Whereas, the DCF Method involves the projection of future operations over multiple periods, applying a discount rate and discounting the income stream to the present value.

    • Market Approach: This approach is performed by identifying publicly traded or recently sold private entities with similar characteristics to the subject being valued. Relationships between fundamentals, such as revenue, cash flow, or assets are identified, and the computed multiples are then applied to the subject’s corresponding fundamentals.

    • Cost Approach: The cost approach presupposes that a responsible buyer wouldn’t pay more for assets than the replacement cost of the assets’ service capacity. Due to the obstacles to applying this approach to entities with substantial intangible assets, this approach is most suitable when it comes to valuing industrial and real estate corporations with primarily tangible assets, or entities for whom liquidation is a likely prospect, making it compatible with not-for-profit valuation only in a rare cases.

    As is the case with for-profit companies, non-profit organizations need to know key financial information in a timely manner to facilitate management decisions and regulatory compliance.  Like any assignment, finding the right solution for the organization requires a thoughtful and deliberate approach. Because the organization has unique characteristics and needs, it’s important to determine the best approach to value your not-for-profit prior and achieve your objectives.

    We have helped a wide range of organizations maximize their assets and expand their efforts, touching more lives and better serving society, including:
    • Developmental disabilities/mental health organizations
    • Social service providers, including health & welfare agencies and human services agencies
    • Special education schools
    • Educational institutions, including private and charter schools
    • Religious institutions, including Diocesan organizations, churches and synagogues
    • Unions and trade associations
    • Membership organizations
    • Foundations
    • Day care centers
    • Arts and cultural organizations
    • Botanical Gardens
    • Golf Clubs - membership organization
    • Supporting organizations
    • Cemeteries
  • The range (type) of valuation and appraisal services for non-profit institutions is similar to those provided the For Profit sector. Depending upon the specific requirements, businesses and business assets must be valued on a regular basis.












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