5 Lessons for Closing a Nonprofit the Right Way

The Chicago Community Trust’s SMART Growth initiative was designed to help small arts organizations develop sustainability in the face of economic shifts and organizational transitions. Its first class of 40 Chicago-based nonprofits participated from 2007 through 2009.

A recent longitudinal study revealed that 33 are still operational as 501(c)3 organizations; three have merged with other nonprofits, while four have closed.

The study’s researchers interviewed staff from the shuttered organizations, gathering their hard-earned insights about where the pitfalls lay, and what steps can make a painful and arduous process easier:

• Board participation is crucial—from early warning signs to final steps. Three out of the four groups reported that their boards missed or ignored the significant issues until it was too late to turn them around and prevent closure, or even to orchestrate a deliberate and orderly wind-down. In addition, their boards disbanded too soon, leaving just one or two members in leadership roles to manage everything alone.
• Expert advice is as important for closing down as it is for starting up. Board members are generally unprepared and uninformed about the financial and legal requirements for closing a 501(c)3 organization. Moreover, there are few informational resources available that explain the process. Strategic planning facilitators can help organizations in crisis lay out an orderly closure; attorneys can help complete the transactions.
• Advance planning safeguards staff members. A structured closure meant that one organization could notify staff well in advance, enabling them to seek work while still employed—an advantage in the job market. Layoffs were avoided completely. The remaining three closures resulted in wholesale staff layoffs; and even the most conscientious board members generally lack the human resources expertise to optimally manage a layoff process.
• Managing the financial fallout takes the longest. Closing out accounts, meeting fiscal obligations and negotiating contract settlements extended an average of 12 to 18 months after the announcement of closing for the reporting organizations, which each had legal counsel managing the process on their behalf.
• Word will get out—so a proactive communications plan comes first. Only one of the four organizations was able to announce their decision and fully own the message from the beginning. The remaining three found themselves fielding calls and playing catch-up as news about their closure leaked to their funders, and to the general public, before they had a communications plan in place.

The SMART Growth program couples three years of grant support with a detailed evaluation developed by the Arts & Business Council of Chicago to provide strategies for improved resilience. The 2014 longitudinal study reveals that, five years on, the first participating cohort has sustained positive impact across five out of the six management areas of focus—but opportunities remain for more targeted support to boost improvement.

SMART Growth welcomed its third cohort of nonprofit organizations in 2015. The next application opportunity will open in 2018.