This is the fourth in the series that explores the inner working relationship between a hospital foundation and its parent during a sale. The author, John Gilchrist, FAHP, CFRE, has lived through one nonprofit sale and is experiencing a second sale. His insights into this process can prove to be excellent counsel to an organization going through a merger or acquisition.
Nothing in this post should be taken or construed as professional advice nor is it intended as such. For your particular situation, you should always seek the advice of a competent professional attorney. I simply seek to share my insights and experiences as this is my second nonprofit sale in the capacity of a Foundation executive in the past seven years.
In general, when one non-profit acquires another, the Foundation being acquired has a corporate member substitution, changes it fundraising focus to the new member, and continues to raise funds and friends, albeit for a different mission. The acquiring organization must work through the important work of integrating two corporate and philanthropic cultures, adapting and combining databases and records, and determining future staffing, for example.
In the event of a for-profit acquisition, the Foundation may be re-purposed, dissolved with any remaining assets going to another foundation with a similar mission, or a conversion foundation may arise. A conversion foundation is typically used to create the strongest degree of separation from the former non-profit enterprise. The conversion foundation is created with the excess of sale proceeds, after the former non-profit’s liabilities and debts have been discharged.
The conversion foundation may be saddled with pension liabilities or other debt, as was the case with the Empire Health Foundation (Spokane, Washington), which arose from the sale of non-profit Empire Health Services to Community Health Systems. In that transaction, pension and workers’ compensation liabilities of approximately $35-40 million were transferred to the Empire Health Foundation (EHF). The move enabled the new for-profit owner to start with a clean slate and may be a requirement of the Asset Purchase Agreement (APA). While the EHF had the extensive level of liabilities, it also had the assets to cover them. And it possessed an unrestricted corpus of approximately $50 million.
The former Foundation is usually dissolved, with remaining assets going to the conversion foundation. In most cases, the former Foundation will have disbursed all its available funds, both unrestricted and temporarily restricted funds prior to the close of the sale. If any temporarily restricted funds remain, state law governs the final dispensation. For example, should the donor be deceased, those funds might revert to the attorney general’s to attain the closest attainment of the restriction – perhaps with the conversion foundation or a community foundation. If the donor is living and does not elect to re-restrict his/her gift, said gift may be returned.
The board of the former Foundation is normally disbanded; though some members may be asked to join the conversion foundation’s new board. The structure of the conversion foundation is much different than your former Foundation. The primary difference is the conversion foundation is likely to be formed as a private foundation, with limited or no fundraising responsibilities. Instead of a major gifts officer, planned giving officer, annual giving officer, the staff complement may likely be program officers, grant management, and a chief investment officer, for example. The conversion foundation may hold an opportunity for the former Foundation executive to remain affiliated with a semblance of the former enterprise. Do not discount or disregard the potential employment opportunity here, but it may not be the right fit for every Foundation executive.
In the next installment, I will discuss questions around fundraising activities post-sale announcement…and as always, your feedback, questions and comments are welcomed.