Need help understanding a purchase of a non-profit

[opihiman2]

Hello everyone,

 

I hope this is a good place to ask this, but does anyone know what happens during a distressed buyout of a non-profit organization?  I'm reviewing a case study of a recent asset sale purchase of a Ch.11 non-profit hospital in California; however, I'm very confused: who receives the money in the transaction?  With publicly held companies, the equity holders are bought out and the new owners assume the assets and liabilities.  In a non-profit, there is usually no equity holder.  So, what happens here?  Any ideas?

[nodnub]

this is an interesting question.

 

Since you state that this is a distressed buyout, my first thought is that the purchase price is going to pay off or partly reduce the debt load to a manageable level. After the transaction the organization would be operated as a for-profit business by the new owner.

 

 

[Kraven]

I don't know what happens in this case.  But note that being a non-profit has nothing to do with ownership per se.  It's a tax distinction.  The tax code may have certain requirements on who may own a non-profit, I don't know about that.  But it doesn't change the ownership of the entity.  The owners are whoever they are.  If it's a hospital it could be the city, county, etc.  I wouldn't think it would be a profit maximizing entity unless this was part of a charitable program they have.  I'm just making this up, but it wouldn't surprise me if one of the big hospital operators had a couple small non-profits somewhere along the way as part of their charitable giving program.  I doubt it, but could happen I guess. 

[RRJ]

Nonprofit corporations are creatures of state law.  Most model act states will have similiar nonprofit corporation statutes but California probably is not one -- it still probably follows the pattern.  Basically, the nonprofit statute will provide for where the assets can be distributed upon liquidation.  Usually the list is narrow -- to another nonprofit entity, sometimes limited to another nonprofit with the same or substantially similar eleemosynary purpose. 

 

Here, a hospital nonprofit would first pay off all liabilities, and then would probably need to find a suitable entity to distribute its leftover "equity" assets to.  Probably another nonprofit hospital in the area.  This is a highly simplistic analysis, and a lot depends on how the funds are held -- in restricted endowments?  in general accounts? 

 

Also, nonprofit hospitals have stretched over the past 20  years into many areas of for profit behavior that are related to their mission, and many of these assets can be or even must be separated out from the true nonprofit assets. 

 

Finally, note that an entity can be a nonprofit under state law, which means it is not taxed on its income for state law purposes, but this does not guarantee at all charitable status under US federal law, which requires that you qualify as a 501c3 entity in order to get the doubly good tax treatment of not only not being taxed on income, but also allowing donors to deduct contributions.  A nonprofit hospital would almost certainly qualify as a 501c3 though, so this is probably not an issue.  UBTI -- Unrelated Business Taxable Income, will also be an issue here -- the business subsidiaries and related affiliates that do business in fields unrelated to the primary field will be subjected to UB taxes.  Hope this helps some.

[opihiman2]

Thanks everyone.  I'm still confused as ever, and I haven't been able to find more info online.  I'm still wondering if this transaction converts the non-profit in a profit venture.  I guess, based on nodnub, it will.  I don't know.  Everything I've read so far hasn't regarding non-profit buyouts hasn't explicitly said this.  I do know that its cash and short term investments are divested into charity or other non-profit foundations.  However, I'm still confused where the money goes.  I'm guessing it's used to pay down all creditors and liabilities.  Then, whatever is left over is used as net sale proceeds for charity.  I dunno. 

 

 

[nodnub]

hi opi.

 

I should have stated more clearly that my post above was just conjecture (rational, I hope).  I'm not sure how it works either.

[SharperDingaan]

 

NPO's are governed by local state law, but most will follow the same principles.

 

As with any liquidation, asset proceeds pay off liabilities in order of seniority. Any surplus goes to repaying the granters of their various endowments (equity equivalent). In a bankruptcy the liabilities > proceeds, & there will be no return of funds.

 

Sale & leaseback of an asset (ie: hospital wing & all related content) is common practice. Usually the result of either 1) bankers pressing for repayment of outstanding loans, 2) the hospital has a funding commitment that it cannot meet from its endowment structures, or 3) the hospital is expanding & this is funding their portion of some partnership agreement. [Googel P3 partnerships]

 

Given that the state is California, its probably 1) or 2)

 

SD