The well-known saying, “Honesty is the best policy,” rings especially true for nonprofit organizations and the topic of dissolution. Although a tough decision and perhaps one that many will want to avoid, it is important for organizations to (a) acknowledge in a candid and timely manner when they’ve reach the point where continued operation is not a favorable decision, and (b) take the necessary steps of properly “closing down.”
Dissolution discussions may arise for a number of reasons, from a fragile economy to the gradual deterioration of the charity’s viability. Fieldstone Alliance’s “Nonprofit Decline and Dissolution Reports” addresses why, when, and how to go out of business gracefully in hopes of “creating a climate” to stimulate discussions about this “important and yet poorly understood element of an organization’s life cycle.” The report lists many “warning signs” but by no means conclusive reasons for dissolution (many organizations “have experienced one or more of these perilous circumstances and have successfully overcome the problems”) such as:
- Loss of all or a significant portion of support from a key funding source.
- The “chasing dollars” syndrome of developing programs primarily to attract dollars that did not serve the purpose of the organization, failed to reach service goals, or was poorly planned.
- Sudden and dramatic expansion of services beyond the organization’s expanding capability.
- Falling behind on financial obligations followed by quick-fix financial strategies that did not ultimately solve the financial crisis.
- Consistent inability to meet service and financial projections due to unrealistic goals, untested assumptions, and a poorly-thought-through plan.
- Departure of key board and staff as a by-product of the organizational decline process.
Fieldstone Alliance advises organizations to answer the question of dissolution with “a conscious decision about the organization’s future rather than just letting it happen” and thus allowing “a failing organization to linger endlessly.” Some of Fieldstone Alliance’s suggestions for how to address dissolution include:
- Developing a six to 12-month operation plan with specific goals and bench marks (staffing, financing, cash flow, service projections, etc.) to arrive at an objective assessment of the organization’s condition and viability.
- Develop a set of criteria to assess the soundness of the plan, helping to avoid “let[ting] hope override reality and emotion prevail over reason.”
- Convene an ad hoc committee of the board for the purpose of considering the question of continuation in light of the information, thereby ensuring the question will be dealt with now rather than later.
Once an organization decides to dissolve, they have a two-fold task. First, an organization must adhere to the dissolution filing requirements. Second, as La Piana highlights, “a nonprofit should not simply close its doors and go away… leaders must [also] determine a way of closing down that preserves any possible services or funds for its mission.”
Because nonprofit organizations are operated for the public benefit and many members involved in the dissolving organization will continue to work in the nonprofit sector, an organization facing dissolution should consider additional aspects such as:
- Being honest with major funders who may in turn, help with transitional funding.
Transferring any strong and valuable programs to another organization through some form of strategic restructuring.
- Notifying and negotiating all outstanding contract obligations in order to leave the reputation of the staff and board intact and the organization’s good name unsullied.
- Determining what level of service can be maintained.
- Identifying clients most at risk due to the loss of service and taking steps to minimize it such as identifying other service providers to which such clients can be transferred in a smooth transition.
- Negotiating less than full payments with creditors. Some may be willing write off the debt as a donation.
- Seeking consultants to address other areas such as attorneys for legal loose ends and requirements, a real estate agent or lawyer for valuation and disposition of real property, and career counselors to help staff with their subsequent job search. Rare exceptional cases involving very large institutions may even consider social workers or psychologists to help the staff cope.
While a dissolution is often naturally accompanied by feelings of shame, guilt, or resentment, the Fieldstone Alliance reminds organizations that “[v]oluntary dissolution of a nonprofit corporation doesn’t mean the end of the world; it simply means there may be other, better ways to get the job done.” Some may dissolve due to mismanagement; others may be “victims of changing times, fewer dollars, and other circumstances beyond their control”; and the remaining may adjust and learn to operate in new ways with fewer dollars. Regardless of which route an organization ultimately follows, all decisions should initially begin with an honest discussion about dissolution, “considered and managed in thoughtful and responsible ways.”
La Piana’s tips on Dissolution are available here.
More information can be found in the Fieldstone Alliance’s “Nonprofit Decline and Dissolution Report.”
– Emily Chan