Business appraisers typically value "for-profit" enterprises that are driven by revenue and bottom-line income. But what happens when the entity in question is a nonprofit organization, one with no shareholders, no dividends, and no motive to generate profit? Can a nonprofit be valued? The answer is yes, though the methodology and purpose behind such an appraisal are quite different.
There are several reasons a nonprofit organization may require a formal valuation, such as M&A transactions, internal strategic planning, donation or gift purposes, litigation or dissolution, and financial reporting.
Unlike for-profit companies, nonprofits do not generate income for distribution. As a result, traditional valuation methods may not apply in the conventional sense. Here are some thoughts on possible approaches:
- An asset approach may be relevant and involves calculating the fair market value of the organization's tangible and intangible assets minus liabilities.
- A "Cost to Create" method estimates how much it would cost to recreate the nonprofit from scratch. This includes the cost of acquiring similar assets, staffing, and establishing the same level of community reach or donor base.
- A modified income approach may look at the excess of revenues over expenses and whether the organization has a sustainable surplus to support its mission.
Suppose there is any similar nonprofit company market data available. In that case, the appraiser may be able to compare it to similar entities in terms of donations received, operational scope, or programmatic output. The market approach may likely be limited or non-applicable, given the uniqueness of many nonprofits.
Valuing a nonprofit comes with unique complications, including:
- Donor Restrictions: Some funds and assets may be restricted and not freely transferable.
- Intangible Value: Community goodwill, volunteer labor, and mission-driven reputation can be difficult to quantify.
- Mission Over Metrics: The value of a nonprofit's impact doesn't always align with financial indicators.
Valuing a nonprofit organization requires a thoughtful approach that goes beyond dollars and cents. It's about understanding the real-world value of services rendered, community impact, and the sustainability of the mission. Whether for strategic, legal, or financial reasons, a professional valuation of a nonprofit provides essential insight into the organization's true worth and future potential.