A Match Made For Revenue: Non-Profit Meets For-Profit
New lines of revenue always seem to be a main focus in the health care world, both in the for-profit and non-profit sectors.
Heather Miller, senior counsel for law firm Broad & Cassel says that, in the case of non-profits and for-profits a joint venture can be beneficial when it comes to opening up revenue possibilities for both parties. “A joint venture with a for-profit entity can allow a non-profit to gain access to a new source of funding in the form of equity capital where sufficient debt capacity it not available,” Miller says.
“Selecting the right partner is a significant fact to consider. The choice of who the non-profit affiliates with is crucial since the success of the joint venture will require the two parties to work well together and for their cultures to easily blend.”
Sandra Greenblatt, a Florida Bar Board Certified Healthcare Lawyer, partner with the Law Firm of Lubell Rosen, says that exempt organizations are getting a lot more entrepreneurial in recent years because they have had to find ways to generate new sources of revenue.
“Government reimbursements are down, and even the traditional charitable contributions that non-profits have relied on over the years, have not increased due to the changes in the economy. So, hospitals and nursing homes are the two groups that are most active in joint venturing,” Greenblatt says.
Dennis Williams, associate at DLA Piper says that from his experience, there are often symbiotic relationships where both can actually benefit from the expertise of either party.
“The for-profit brings to the joint venture table with the non-profit partner the core concept that every service must earn a profit. The non-profit brings to the table the core concept of offering comprehensive programs. The utilization of the for-profit expertise in the non-profits scope of business is the foundation for the symbiotic beneficial relationship,” Williams says.
As in all joint venture possibilities, the opportunity of a joint venture between a non-profit and for-profit entity comes with its own list of risks and benefits that both parties need to take into account.
Williams says in some cases a joint venture has given non-profits an opportunity to move into a new area of revenue that they otherwise did not have access to.
“In some situations, the joint venture allowed them to expand and revise a specialty service that was offered, but restructure it in a more streamlined process that often led to higher patient satisfaction with greater success. Beyond the two parties, patients are often the greatest beneficiaries from these types of ventures. The partnering of entities with specific skill sets can result in better delivery, improved services, and streamlined care for the patient,” Williams says.
Greenblatt says that from the for-profit side, there are all sorts of health care related businesses that are out there. An example she uses as a benefit to both parties is in the case of a university.
“Universities do research, they want to build research facilities and they need sources of revenue to do that. There are numerous for-profit companies that would like to invest and perhaps share the future benefits of a major discovery or development. The university needs the capital, and investors are hoping for a big return at some point in the future,” Greenblatt says.
According to Greenblatt, the opportunities are as numerous as the entrepreneurs and can appear limitless. However, when there is a non-profit organization involved, there are guidelines and rules that have to be followed, or the non-profit really can be hurt.
Williams says that the majority of the risk involves the actual creation of the contract in general.
“I think one of the risks always involved is, what is the termination provision and is there something that is going to impact on either’s ability to run their other lines of businesses and keep it from working with competitors,” Williams says.
“You need to make sure you are upfront in terms of what your projected fee structures are and how it is going to be structured if profits are being shared or if it is a strict management fee. In many of these cases it is recommended to get an independent fair market analysis from a third party appraiser. That often helps alleviate a lot of issues.”
Both Williams and Greenblatt also emphasize the importance of the non-profit being given an out in the deal and the provisions upon which they are able to walk away and who has control of the particular business upon termination.
“In healthcare we deal a lot with non-profit organizations. So, I am very familiar and experienced in dealing with the IRS constraints on non-profits. A non-profit that is going to be tax exempt under the IRS has to be operated strictly for a charitable, religious, or educational purpose,” Greenblatt says.
“f they start getting into other kinds of services, that are considered unrelated, the IRS can tax that new revenue as unrelated business income. Or, if the non-profit devotes too much of its assets or people, or services to aspects of the business that are not to further the charitable purpose, they can actually face losing their exempt status. That would be fatal for most of these organizations.”
Greenblatt says the type of entity for the joint venture is variable. It can be a partnership and the non-profit and for-profit can be partners. Or the non-profit can be a manager of the LLC. The issue is how much is the non-profit participating. To understand some background, there are no shareholders in a non-profit. Any profit must stay in the organization to further its exempt purpose. There is a prohibition on private benefit and inurement. The profits of a non-profit organization cannot inure to the benefit of a private person,” Greenblatt says.
“The idea of placing numerous assets into a joint venture means that the joint venture itself has to follow those limits and must be for the purpose of furthering the exempt mission. The way that the IRS expects that to happen is that the non-profit has to have control over the joint venture. For example, when there is a board of directors, the board has to be made up with the majority of non-profit members.”
“If the non-profit is going to devote a substantial portion of its assets, a joint venture with a for-profit entity becomes much more complicated,” according to Greenblatt. “The IRS requires the non-profit to maintain control of the venture to ensure it operates consistently with the exempt purpose. This often creates tensions between the parties if not made clear in the negotiations. It is critical that the documents forming the joint venture spell out exactly how the non-profit organization maintains and exercises control and this must translate into actual operations of the joint venture as well. When done well, joint ventures of this nature can be successful and a win-win for both the non-profit and the for-profit participants.”
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