The valuation of a for-profit business is relatively straightforward, though the specifics can become quite complicated: it involves the appraisal of assets and the assessment of income and debts to come up with an amount that accurately represents the value of the business. However, this is not so easy when it comes to businesses that don’t show a profit, such as churches, parent teacher organizations and charities. How are non-profit businesses valued?
Challenges
Not-for-profit entities, also known as NFPs, are met with several challenges in measuring their fair market value within certain transactions, such as beneficial interests in trusts and split interest agreements, according to the AICPA. This is in contrast with corporate for-profit businesses, which can use brand valuation to identify their profits to determine and explore business goals, such as investor relations and portfolio tracking and management, says Mike Handelsman writing for Inc.. Non-profits, however, can’t rely on these clear-cut profit streams even when they do bring in money for various causes.
Why Value Is Important
You may wonder why a non-profit would ever need to value their business, but there are many valid reasons why this would be beneficial. A valuation can help such organizations in converting from for-profit to not-for-profit status, with contributions of privately-held assets for IRS reporting, in the sale of assets to raise funds, and to report the value of their assets on IRS Form 990. Assigning a concrete value to any business or organization can also strengthen its brand, which in turn makes it easier to bring in funding, donations, and support for a variety of causes. That growth of the support base is what’s crucial here, not necessarily the dollars and cents of it all. When the public has a greater understanding of the value of an organization they’re supporting, they are perhaps more likely to support it, not only through monetary donations, but through volunteering opportunities and fundraising as well.
Another reason valuation is so important to non-profits is because the critical financial information developed is necessary in order to stay abreast of the financial health of the organization, make better management decisions, and stay in compliance with regulations. Additionally, it’s necessary to have an accurate value to secure the proper tax exemptions, and to obtain preferred tax treatment in the eyes of the IRS.
Determining Fair Market Value
There are a few methods that can be applied to determine the fair market value of a non-profit, including income capitalization and discounted cash flow (DCF) analysis. Other potential methods work by identifying publicly traded entities that operate in the same vein as the non-profit to draw parallels between things like revenue, cash flow and assets. In any case and whichever method is preferred, it’s always crucial to consult with an appraisal professional. Only an experienced professional can ensure that the information provided to the not-for-profit is accurate and can guide them on what to do next.