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Making the Move to an Endowment: Tips for the Small Nonprofit Organization

The word “endowment” feels like one limited to large corporate charitable organizations, universities, and hospitals. However, nonprofits of nearly every size, large and small, operate endowments as a means to secure the long-term viability, mission, and legacy of their organizations.



Like individuals who set money aside for a rainy day or retirement, an endowment serves a nonprofit by providing a restricted fund that limits its spending (ideally) to only the interest or earnings from the endowment’s investments. As with any restricted fund, the goal is to grow the underlying principal over time. This is best accomplished with a solid investment strategy combined with consistent and successful fundraising efforts.

Endowment funds can be an excellent catalyst to lure new donors, as donors typically prefer to give gifts that will have a long-term impact rather than funding day-to-day operations. Once a small nonprofit is in a financially stable position day to day and has adequate reserves established, it might start thinking about establishing a more long-term endowment fund.

While there is no minimum amount required to start an endowment, a good rule of thumb is that once the organization has acquired three times its operating budget, it may be time to consider an endowment. Here are just a few tips to consider in forming an endowment.

Tip 1: Establish the Rules for the Endowment Fund

The board of directors needs to set up the legal structure, either through a separate 501(c)(3) (Foundation) or with strict written rules as a separate fund within the existing nonprofit. Either way, the legal structure or rules should establish a name for the fund, set the limits restricting the use of endowment funds, and provide guidelines on how much interest can be used to fund the nonprofit every year. An Investment Policy Statement (IPS) should also be set up to guide the overall investment strategy for the endowment.

None of this is overly complicated or expensive, but your board should consider consulting an experienced investment advisor, accountant, and attorney to ensure compliance with both state and federal laws and guidelines.

It is also important to establish the rules for donors, including minimum amounts that can be restricted for use within the organization over a period of time—known as term or permanent endowments, as opposed to quasi-endowments whose funds are expended at the sole discretion of the organization.

Tip 2: Establish an Effective Fundraising Strategy

Identifying and approaching potential donors is critical in the success of any size endowment. While communicating the importance of the organization’s mission matters, major donors are going to want to know the organization is stable in its ongoing operations.

Like individuals, nonprofits need to show adequate reserves of at least three to six months of operating expenses to demonstrate they are ready to begin an endowment. Donors are more likely to support organizations that can match up a need in the community with a strong commitment to fiscal responsibility.

Tip 3: Determine the Investment Goals and Objectives

Depending on the amount of assets and the short- and long-term needs of the underlying nonprofit, the board of directors will have to determine overall goals for investing funds raised in the endowment.

Those with short-term needs will likely seek a more conservative approach and simply place the funds in a government-backed bank account. However, as the endowment grows, the nonprofit will likely seek a slightly more aggressive investment strategy to take advantage of investment growth over time.

Tip 4: Consider a Qualified Fiduciary Investment Advisor

Once your organization has successfully built up its reserve fund and has acquired assets in the endowment, it may be time to consider hiring a qualified investment advisor to assist with the management of those assets.

We recommend seeking only those advisors who adhere to the same fiduciary duty that board members owe their nonprofit organizations. And while there are more than 300,000 “investment advisors” in the United States, only a small minority work as full-time fiduciary advisors to their clients.

Summary: Helping Through the Years to Come

Endowments are not just for large nonprofits, hospitals, and universities. With careful planning and strategic thinking, endowments can assist charities of all sizes in fulfilling their important missions for years to come.

Contact us for a complimentary needs assessment phone call.

Clint Patty, J.D.

As Managing Partner, Clint serves on the management team providing leadership, supporting business development efforts and providing client consultation.
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