Q&A #117 – How does a nonprofit transfer a program to another nonprofit?

Question: My nonprofit organization recently determined that one our programs no longer aligns with our strategic objectives. We have started discussions with another nonprofit about potentially transferring the program, but we are not sure exactly what this involves. How do we transfer a program to another organization?

Answer: Transferring a program from one nonprofit to another can be unexpectedly complicated, and the details will vary depending on the specific circumstances. In effect, the process is similar to a merger or acquisition, and requires extensive due diligence, identifying the assets associated with the program, executing a written agreement with the appropriate terms and conditions, and obtaining the necessary approvals by the respective Boards of Directors (and sometimes voting members, if applicable).

One challenging aspect of this process is identifying the tangible and intangible assets that will need to be transferred in order for the transferee organization to carry out the program.

Cash may be one category of assets to be transferred, and even the transfer of cash can raise challenging issues. For example, the transferor organization must determine whether any cash assets associated with the program (grants and donations) are subject to restrictions. If so, the transferor organization should review these restrictions closely to ensure these restricted assets are permitted to be transferred to another organization. If permitted, the restrictions should be reflected in the final written agreement. If the restrictions do not permit transfer of the assets , the consent of the contributor(s) could be required to modify the restrictions.

Next, the parties should do an inventory of all intellectual property that will need to be assigned or licensed in order for the transferee organization to carry out the program. This can include the name of the program, written materials, artwork, designs, logos, photographs, and other items. The copyrights and trademarks for these items may or may not be registered, and if registered, additional steps will likely be required.

Do the same for other intangible assets that are specific to the program, such as email lists, website and email domain names (URLs), and social media accounts. The transfer of email lists often raises very difficult issues, as the determination of which, if any, email addresses are appropriate to be transferred as part of the program is a key negotiation point. The transferor organization must also review its privacy policy and applicable laws, potentially including the European Union’s General Data Protection Regulation (GDPR) if the email lists include anyone subject to the protections of the GDPR.

If the program involves tangible assets (such as equipment, merchandise, inventory, etc.) the parties will also need to negotiate the transfer of these assets.

And if the program involves contracts that are currently in effect (service contracts, leases, etc.), the transferor organization must review these contracts to determine if they can be assigned. If not, the transferor organization should assess whether there are costs to terminating these contracts and negotiate which party should bear these costs.

Planning Tip – When considering whether to transfer a program to another organization, make sure to factor in the time and effort associated with identifying the assets involved, assessing the legal risks, and negotiating with the other party, as well as whether transferring the program could potentially have a negative impact on the transferor organization’s brand and reputation. In some cases, it could make more sense to simply temporarily mothball or cease the program rather than deal with the cost and complication of completing a transfer.

The above is merely a basic overview of some of the key issues involved with transferring a program from one organization to another. The specific circumstances may give rise to other issues not addressed in this piece. Further, this piece assumes that both the transferor and transferee organizations share the same tax-exempt status classification. Additional considerations will arise if this is not the case.

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