“Selling” A Not-For-Profit?

There are exit strategies for not-for-profit (NFP) healthcare-related organizations that decide for good reason to change their “focus,” “wind down” some specific activities or contracts, or dissolve their NFP entity. Legal experts will generally tell you that you cannot sell the NFP given the IRS regulations governing such entities, but there are legal ways to adhere to these regulations and provide options for the evolving NFP.

One method is for a NFP to sell assets such as contracts or facilities to a third party, as long as the sale complies with applicable IRS guidelines and other restrictions that vary by state or locale.  In this scenario, the NFP must use the proceeds of the asset sale (e.g. “selling” a contract to provide specific healthcare services to an acceptable third party) in a manner consistent with the NFP exempt purpose and organization.  This may range from using sale proceeds to fund alternate initiatives within the scope of the NFP, to paying off existing obligations of the NFP, to reimbursing  legitimate expenses upon the “wind down” of the NFP (including employee compensation), or to contributing the excess proceeds to another NFP.  There are multiple IRS guidelines in this area that are essential to review as part of any prospective analysis by the entity and their attorney.

If the NFP wishes to see services continued, but no longer has the staff or expertise to continue services on its own, the NFP may consider entering into a management agreement with a for-profit entity.  The for-profit entity can be paid a reasonable fee for this service, with certain applicable restrictions.  One caution is that such agreements can lead to some tension between the entities because of potentially conflicting missions and business strategies.

While working with NFPs that are exploring their options we always advise that they contact tax/legal experts like before proceeding with such a transaction.  Properly planned, such transactions can provide a mutual benefit for the parties involved, while potentially improving the quality of services provided.