How Do You Effectively Conduct Due Diligence on a Nonprofit?

Why does Due Diligence matter?

Building a strategic nonprofit portfolio requires more than just selecting causes that resonate with personal values. To ensure long-term impact, donors must conduct thoughtful due diligence to assess whether organizations are well-governed, financially stable, and delivering meaningful results. A strong philanthropic strategy is built on informed decision-making—one that goes beyond passion and incorporates a clear understanding of an organization’s leadership, financial health, strategic impact, operational capacity, and public perception. Often, an in depth learning journey is necessary before rounding out a portfolio and corresponding budget. Below, we outline five key areas to consider when evaluating nonprofits.

1. Leadership and Governance

The strength of an organization’s leadership is critical to its success. When assessing leadership and governance, review:

• The tenure and experience of the Executive Director;
• The composition and engagement of the Board; 
• The succession plan and organizational stability; and 
• The adherence to governance best practices such as a conflict of interest policy for all board members, a self evaluation of board performance, board orientation, and 100% board giving. 

Some of these elements are easier to more subjective than others  so we recommend starting with the facts.

2. Financial Health

A nonprofit’s financial sustainability ensures that philanthropic investments are used effectively and that the organization can endure long-term. Key indicators include:

• Availability and transparency of IRS Form 990s and audited financial statements;
• Revenue diversification and financial reserves;
• An endowment fund with oversight from an investment committee;
• Fundraising efficiency and administrative cost ratios; and
• Trends in grant funding and earned income.

Looking beyond the numbers is also important as sometimes there are good reasons for ratios to be “off” or debt to appear concerning when it shouldn’t be.

3. Strategic Impact

Philanthropic dollars should support organizations that are making measurable differences in their communities. To assess impact, look first at the clarity and alignment of mission and vision. It’s important that the nonprofit does not chase grant dollars, but stays true to its mission. We also recommend seeking data around programmatic outcomes. Based on further research and perhaps by asking during a site visit, it’s also helpful to know if the nonprofit has a well-defined strategic plan and if the organization is committed to continuous learning and evaluation.

4. Operational Capacity

Beyond strong leadership, an organization must have the internal infrastructure to execute its mission effectively. Some questions to support the due diligence process, include: 

• Does the nonprofit have the right amount of staff–are they successfully retaining talent? 
• How many volunteers do they coordinate and what does that retention look like? 
• How are volunteers managed and do volunteers feel valued? 

Capacity building grants can be helpful for nonprofits to invest in technology and data systems to improve efficiencies and ensure compliance. Having a better understanding of the nonprofit’s needs requires leadership to be able to articulate those wish list items.

Public Perception & Transparency

A nonprofit’s reputation and ability to build trust among donors, partners, and the community are crucial. To assess this, we consider ratings from organizations like Charity Navigator and Guidestar. It’s also important to know how the nonprofit communicates with donors and if their methods satisfy your desires as a grantmaker.

Final Thoughts

By aligning due diligence findings with your philanthropic strategic plan, you can create a more intentional, impactful, and sustainable giving approach. Thoughtful evaluation not only strengthens the effectiveness of your charitable investments but also empowers nonprofits to achieve lasting success. With a well-informed perspective, donors can confidently support organizations that align with their values while maximizing positive change in the communities they seek to serve.

About Grant Philanthropic Advisors:
We’re an independent, Charleston-based firm helping clients to focus and maximize their philanthropy—in turn, strengthening the fabric of our communities. Founded in 2019, we help donors move from responsive patterns of giving by assisting clients to identify values and become more strategic in their philanthropy. Our goal is to help donors to become more effective as change-makers. Our team has a combined 100 years of experience working in the field of philanthropy.

We work with foundations (large and small staff teams), donor advised fund holders, multi generational families, individuals, philanthropy supporting organizations and corporations to design philanthropic strategies. We work with philanthropies that grant $1 million to $40 million annually. Our clients span the Southeast with a concentration in Charleston, Atlanta and Charlotte.