Analysis of how to calculate the Valuation of Non-Profit Organizations – NPOs in Brazil

Introduction

In this post, we are going to talk about an interesting subject, but little discussed, spoken or written, which is: “What is the value, the price of my Non-Profit Organization – OSFL ?” Presidents, managers, directors of many NGOs will say: "Priceless…" It's non-negotiable, it's “unsellable”…. lol.
Brincadeiras à parte, realmente para muitos gestores do terceiro setor, sua organização não tem preço, isso por causa de uma série de variáveis, dizem: "it is my dream", “It’s a job that I don’t gain anything from”, “It’s just to serve people in need”, “I do it for love, I have no interest in making money with my organization”, “I do it for the greater good of other people”.
What is certain is that dreams often do not come true, and we end up mired in debt due to a series of factors: reckless management, lack of knowledge, little technical qualifications, lack of support from governments, etc.
In the end, we just want to close the organization's activities and start over, moving on with our lives again, without the weight or responsibility of managing, managing, administering an organization without money.
However, at this point, we encountered some problems. It's not just about forgetting the institution and leaving it aside, as if it didn't exist or as if there was no longer any responsibility for it. Even to close the activity of a Non profit organization money is needed.
The problem is, if we are closing the work, and aiming to deactivate the organization, it is usually because we no longer have money, or we no longer have the conditions or interest in continuing to put our money where we still cannot see practical results.
In this way, many directors and presidents simply leave the institution aside, as if it did not exist and end up not writing off the CNPJ. And here we find one of the biggest mistakes made by administrators. It is necessary to drop the CNPJ of the Institution and check that absolutely no outstanding issues are left behind. Because, depending on the pending issue, the public authorities will certainly come after the president and directors, collecting debts and sometimes denying the CPFs those responsible for credit protection agencies.

In order to avoid this, many presidents and directors of a OSFL they prefer to transfer ownership of it, even to try to minimize losses. And this type of solution, change of ownership, is regulated and regulated by the legislation that deals with the subject.

Porém, nesse aspecto, objetivando minimizar os prejuízos os gestores dessas organizações solicitam algum valor em pecúnia para transferirem essa titularidade, até mesmo porque quando da criação da Instituição, tiveram gastos com confecção de edital, estatuto, ata, registro em cartório, acompanhamento contábil, advogado para assinar o estatuto e etc. Ou seja, são investimentos que muitas vezes saem do bolço do presidente, do idealizador ou da diretoria, e que, invariavelmente, nunca retornam.

Therefore, one of the solutions is to try to pass on the aforementioned institution for a minimum amount. And here the difficulties begin. Many managers or presidents have no idea about prices. They do not know how to quantify or price the value of their institution. It is not difficult to see people offering the transfer of ownership for completely unreasonable, unrealistic values.

Many people in charge have already contacted me looking for people interested in their institutions and charging exorbitant amounts, one hundred thousand, two hundred thousand reais. And my question is, why do you think your institution is worth this? People just don't know. They say they have no idea of the price.

Others simply think that, because an institution has been in existence for 10 years, they understand that such an institution is extremely valuable and end up requesting amounts that they will never find anyone to pay.

Therefore, I am writing this article to guide interested parties and managers and presidents about the possible real value of a Non-Profit Organization – OSFL. Assim, questiono, você sabe o valor da sua Organização, da sua Instituição? Você sabe o que é o Valuation? Então me siga que discorrerei sobre esse tema logo abaixo.

What is Valuation?

Valuation is the term in English for “Company Valuation”, “Company Valuation” and “Value Arbitration”. This area of finance studies the process of evaluating the value of a given active, financial or real. In this case, we are talking about the Valuation of a Non-Profit Organization in this article. Is it possible to value this type of organization? Yes, it is possible and follows the same principles as a for-profit company.

Avaliações podem ser feitas sobre os ativos (por exemplo, investimentos em títulos e valores mobiliários, tais como stocks, options, companies or intangible assets such as patents It is trademarks) or about liabilities (e.g. bonds issued by a company).

Below is a Wikipedia link giving more details on what the term is, methods and references.

Valuations are required for a variety of reasons, such as análise de investimentos, capital budget, Fusion and acquisition, financial reports, taxable events to determine liability tax is at litigation^[1], and also as a management measure ^[2].

Valuation:
Determining the value of a non-profit organization (NPO) in Brazil can be a complex and multifaceted process, due to the non-profit nature of the organization and its distinct objectives from for-profit companies. However, there are several methods and approaches that can be used to estimate the value of an NPO, considering its social, environmental and financial impacts.

Valuation Methods:
1. Asset-Based Approach:
Net Book Value (VLC): Soma dos ativos menos os passivos da organização. Simples e transparente, mas não considera o valor do impacto social e da capacidade futura de geração de recursos.
Revalued Asset Value (VPR): Adjusts the value of the organization's assets to reflect their current market value. More accurate than VLC, but still limited in considering intangible aspects.

2. Cash Flow Based Approach:
Net Present Value (NPV): Discounts the organization's future cash flows to present value using an appropriate discount rate. Considers future resource generation capacity, but depends on uncertain projections.
Internal Rate of Return (IRR): Determines the discount rate that makes the organization's NPV equal to zero. It indicates the attractiveness of investing in the organization, but does not provide an absolute monetary value.

3. Mixed Approach:
It combines elements of asset-based and cash flow approaches, seeking a more complete view of the organization's value.
Pode incluir indicadores qualitativos como impacto social, reputação e capacidade de gestão, além de dados financeiros.

4. Market Approach:
Compares the organization to other similar NPOs that have been sold or have publicly available market values.
Useful when comparable market data exists, but may be limited by the scarcity of comparable transactions in the nonprofit sector.

Important Considerations:
Missão e Impacto Social: A missão, os valores e o impacto social da organização são elementos essenciais para o seu Valuation, pois diferenciam-na de empresas com fins lucrativos.
Resource Generation Capacity: An organization's ability to generate resources sustainably through donations, partnerships, programs and other sources is crucial to its viability and value.
Governança e Transparência: A qualidade da governança, a transparência na gestão e a prestação de contas são fatores importantes que influenciam a confiança dos stakeholders e, consequentemente, o valor da organização.
Community Engagement: O nível de engajamento da comunidade com a organização, incluindo voluntários, doadores e beneficiários, é um indicador importante do seu impacto social e valor.

Recommendations:
Define the Purpose of Valuation: It is crucial to clearly define the valuation objective, whether for merger, acquisition, fundraising or internal evaluation purposes.
Select the Appropriate Method: The choice of the valuation method must consider the characteristics of the organization, the availability of data and the objective of the valuation.
Engaging Experienced Professionals: Involving professionals experienced in valuing NPOs and the non-profit sector can ensure the quality and reliability of the valuation.
Consider Qualitative and Quantitative Factors: Uma avaliação completa deve considerar tanto os aspectos financeiros quanto os qualitativos da organização, incluindo sua missão, impacto social, governança e capacidade de gestão.
Communicate Results Clearly: The valuation results must be communicated in a clear and transparent way to stakeholders, considering their needs and expectations.

Calcular o valuation de uma organização sem fins lucrativos (ONG) pode ser desafiador, pois métodos tradicionais de avaliação, como múltiplos de receita ou lucro, não se aplicam diretamente a essas entidades. Em vez disso, é necessário considerar outros fatores que reflitam o impacto e a sustentabilidade da organização. Aqui estão alguns métodos e abordagens que podem ser utilizados:

1. Avaliação pelo Impacto Social

Avaliar o impacto social é crucial para ONGs. Essa avaliação envolve quantificar os benefícios sociais e ambientais gerados pela organização. Métodos comuns incluem:
Cost-Benefit Analysis (CBA): Compares the social and economic benefits of the NGO's projects with the costs involved.
Social Return on Investment (SROI) Analysis: Mede o valor do impacto social gerado em relação ao investimento feito.

2. Valuation by Assets and Liabilities

Asset-based valuation considers the value of all tangible and intangible assets of the NGO, such as:
Tangible Assets: Properties, equipment, etc.
Intangible Assets: Brand, contact networks, patents, etc.

3. Discounted Cash Flow (DCF) for NGOs

Embora ONGs não busquem lucro, é possível aplicar o método do Fluxo de Caixa Descontado (FCD) adaptado para refletir fluxos de caixa esperados de doações, subvenções e outras fontes de financiamento, descontando esses fluxos a uma taxa de desconto apropriada.

4. Replacement Value

This method assesses how much it would cost to create a similar organization from scratch, considering all the costs involved to achieve the same level of operation and impact.

5. Benchmarking

Comparar a ONG com outras organizações similares em termos de tamanho, escopo e impacto. Isso pode incluir a comparação de indicadores como:
Number of beneficiaries served
Implemented programs
Annual budget

6. Assessment of Beneficiaries and Volunteers

Consider the value generated by the NGO’s beneficiaries and volunteers. This may include the contribution of volunteers in terms of hours worked and the positive impact on the lives of beneficiaries.

Application Example:

Let's assume an NGO focused on education in Brazil. Some steps to calculate your valuation could include:

1. Quantificação do Impacto Social:
   Number of children served
   Improvement in beneficiaries’ educational indicators
2. SROI calculation:
   Identify the costs of educational programs.
   Measure social benefits, such as increased literacy rates, reduced school dropouts, etc.
   Calculate the SROI: SROI=Social BenefitsInvestmentsSROI=InvestmentsSocial Benefits​
3. Asset Valuation:
   List all tangible assets (buildings, equipment) and intangible assets (brand, contact networks).
4. Cash Flow Analysis:
   Project future cash flows from donations and grants.
   Apply a discount rate to bring these cash flows to present value.

EXAMPLES OF ORGANIZATIONS THAT CARRIED OUT VALUATION

1. Greenpeace Brazil: The Brazilian environmental organization Greenpeace carried out a valuation in 2019, with the aim of assessing the value of its intangible assets, such as brand, reputation and technical knowledge. The study was carried out by the consultancy EY and concluded that the total value of Greenpeace Brasil's intangible assets was R$ 400 million.

2. Instituto Ayrton Senna: O Instituto Ayrton Senna, que atua na área de educação e desenvolvimento social, realizou um valuation em 2020 para avaliar o impacto social de suas atividades. O estudo foi realizado pela consultoria KPMG e concluiu que o instituto gerou um impacto social de R$ 1,5 bilhão em 2019.

3. Doctors Without Borders: The humanitarian organization Doctors Without Borders (MSF) carried out a valuation in 2018 to assess the efficiency of its operations. The study was carried out by the consultancy Deloitte and concluded that MSF is one of the most efficient humanitarian organizations in the world, with an average cost of R$ 5,000 per patient served.

4. GRAAC: The Support Group for Children with Cancer (GRAAC) carried out a valuation in 2017 to assess the value of its real estate assets. The study was carried out by consultancy PwC and concluded that the total value of GRAAC's real estate assets was R$ 100 million.

5. Albert Einstein Hospital: Albert Einstein Hospital, one of the largest private hospitals in Brazil, carried out a valuation in 2016 to assess the value of its brand. The study was carried out by the consultancy BrandMonitor and concluded that the value of the Hospital Albert Einstein brand was R$ 1 billion.

Conclusion

The evaluation of an NGO must be a holistic approach that goes beyond financial numbers, reflecting the organization's social impact, sustainability, and tangible and intangible assets. Combining these methods can provide a comprehensive view of the NGO's value.

Bem, de toda forma, o que acontece geralmente é que, a Instituição foi aberta há “X” anos, mas, efetivamente nunca realizou uma atividade efetiva com controle contábil, fiscal e financeiro como determina a legislação. No máximo, são realizadas atividades pontuais que com o tempo deixam de ser realizadas e acaba caindo no esquecimento e no ostracismo. Geralmente, nesse caso, a Instituição não conseguiria apresentar nenhum ativo, invariavelmente só passivos, pouco ou nenhum fluxo de caixa e impacto social nulo.

In this case, none of the Valuation approaches will show significant effects, because the organization simply has no or very little activity throughout its existence.

Thus, in these years of experience guiding organizations regarding interest in acquisitions or availability of transfer of ownership, we understand that a reasonable value to price an organization would be between one thousand and one thousand five hundred reais per year of existence.

Thus, an organization with 3 years of existence would be worth around three thousand to four thousand and five hundred reais and an organization with 10 years of existence would be valued at around 10 to 15 thousand reais and so on.

De toda forma, deixo claro aqui, que esse valores são a realidade que eu encontrei atuando na orientação dos gestores que hora queria adquirir ou hora queriam disponibilizar sua organizações. Não significando nesse caso, que eu esteja precificando ou estabelecendo um preço, uma tabela ou um padrão de valor ou de Valuation de uma Organização Sem Fins Lucrativos, pois, na verdade, se realmente um gestor for disponibilizar sua organização para alterar a titularidade é imprescindível realizar uma avaliação mais criteriosa.

Aqui está um gráfico que mostra a valuation de organizações do terceiro setor em diferentes regiões do mundo, utilizando quatro abordagens distintas: Custo, Renda, Mercado e Impacto Social. As regiões consideradas são América do Norte, Europa, Ásia, América Latina, África e Oceania.

Graph Interpretation

• Cost Approach: Assesses value based on the cost of the organization's assets.
• Income Approach: Baseia-se no fluxo de caixa descontado e na sustentabilidade financeira.
• Market Approach: Compares the organization with similar ones on the market.
• Social Impact: Considera o impacto social gerado pela organização.

Comments

• A North America and the Europe tend to have higher valuations across all approaches, reflecting the robustness of their NPOs.
• Asia It is Latin America present intermediate valuations, while Africa It is Oceania have lower valuations, possibly due to fewer resources and structural challenges.
• The approach of Social Impact tends to value organizations more, highlighting the importance of the impact generated.

This graph can be used to compare the perception of value of NPOs in different regions and understand the predominant approaches in each context. ​

Good Practice Guide for Valuation of Non-Profit Organizations (NPOs) in Brazil

1. Introduction

The valuation of Non-Profit Organizations (NPOs) is a complex process that requires a different approach compared to for-profit companies. This guide offers good practices for carrying out a fair and accurate assessment of these organizations in the Brazilian context.

2. Understanding the Nature of NPOs

• Mission and Vision: A missão e a visão das OSFLs são fundamentais. Avalie o impacto social e os objetivos de longo prazo da organização.
• Sources of Revenue: Identify and analyze revenue sources such as donations, government grants, and program revenues.
• Governance Structure: Examine a estrutura de governança para garantir transparência e responsabilidade.

3. Data Collection

• Financial reports: Collect audited balance sheets, income statements, and financial reports.
• Relatórios de Impacto Social: Evaluate impact reports that show results achieved against the OSFL mission.
• Legal Documentation: Check legal documents such as statutes and compliance records.

4. Valuation Methodologies

4.1 Cost Approach

• Asset Analysis: Assess the value of the OSFL's tangible and intangible assets.
• Reproduction or Replacement: Consider the cost of reproducing or replacing the organization and its programs.

4.2 Income Approach

• Discounted Cash Flow (DCF): Project future cash flows and apply an appropriate discount rate considering the non-profit nature of the organization.
• Análise de Sustentabilidade Financeira: Assess OSFL's ability to maintain its operations with projected revenues.

4.3 Market Approach

• Comparative Analysis: Compare OSFL with similar organizations in terms of size, mission and impact.
• Benchmarking: Use industry-specific benchmarks to contextualize the organization's performance.

5. Avaliação do Impacto Social

• Theory of Change: Avalie como a OSFL define e mede suas metas de impacto social.
• Impact Indicators: Use specific indicators, such as beneficiaries served, changes in quality of life and other measurable results.

6. Risk Analysis

• Operational Risks: Identify risks associated with the execution of OSFL activities.
• Financial Risks: Assess dependence on financing sources and revenue stability.
• Regulatory Risks: Consider the impact of changes in legislation and regulations applicable to NPOs in Brazil.

7. Transparência e Governança

• Práticas de Transparência: Check disclosure of financial and impact information.
• Effective Governance: Assess the effectiveness of the board of directors and the implementation of governance policies.

8. Conclusion and Recommendations

• Valuation Report: Prepare a detailed report with the findings and conclusions of the assessment.
• Recommendations: Forneça recomendações para melhorias na gestão, governança e sustentabilidade da OSFL.

9. References

• Accounting Norms and Standards: Consult the relevant Brazilian and international accounting standards for NPOs.
• Valuation Literature: Use academic and professional sources on the valuation of non-profit organizations.

Well, let's stop here and make myself available to provide any clarifications regarding the text above. If you need to speak to me about this matter, just call me at my email below:

Rubens Santana