Due Diligence for Grants

Topics Covered in This Article:

• What is Due Diligence?
• Benefits of Conducting Due Diligence
• Conducting Due Diligence - Grantor and Grantee

What is Due Diligence?

Due Diligence is a necessary part of the grant funding process. The process involves conducting research and deep dives to properly and legally verify the status of grantees and grantors. It is an essential practice that informs the financial decision of both parties and ensures financial and legal compliance. In addition, due diligence is the first step in a potential long-term relationship between the grantor and the grantee.

If you prefer a third-party organization's due diligence, there are agencies or individuals that specialize in this research and can conduct due diligence. One of the benefits of outsourcing due diligence is that the third party can view both grantors and grantees with greater objectivity and utilize tools and resources you might not have available to carry out the process. In some cases, these types of companies can shoulder a degree of liability. The downside of outsourcing due diligence is the high cost, with rates reaching thousands of dollars.

Benefits of Conducting Due Diligence

• Ensures that grant funds are being used for legitimate projects.
• Helps organizations protect against fraud, money laundering, or being involved in possible terrorist activities or with unlawful organizations.
• Ensures grantor and grantee are aligned, and the relationship will be mutually beneficial to both.
• Ensures compliance with laws
  • Specifically laws to maintain 501c(3) status

Conducting Due Diligence

There is no standard format for how due diligence is done. It depends on various factors and whether you are the grantee or grantor. Both parties need to conduct due diligence to ensure the relationship is mutually beneficial and will help each party reach its goals.

As the Grantor

For the funders (grantors), they have to take into account the following:

• Due diligence threshold - How much due diligence is needed in relation to the funds the organization will be granted.
• Risk appetite - The amount of risk an organization is willing to accept or pursue to achieve its objectives.
• Risk tolerance - The acceptable variations in outcomes, typically related to a specific project, that an organization is willing to accept. Tolerance is more granular in nature (per project and weighed against the appetite), while risk appetite is the organization’s overall level of risk exposure they are willing to accept.

Before actually proceeding with the due diligence process, an organization must have applicable policies in terms of funding. They should know where grant funds will be coming from, the funds' financial limit, and the grant's terms, as these parameters will help determine if the grantee and project are a good fit.

Ways of Doing Due Diligence - Grantor on Grantee

1. Online Research, finding out everything there is to know about the grantee. Research goes beyond the company website and public profiles into sites that give independent perspectives on nonprofits:
   1. Some examples: Candid, Charity Watch, Charity Navigator, GuideStar, GiveWell, ImpactMatters
2. Conduct physical site visits, if possible.
3. Communicate and dig beyond email exchanges and, if necessary, conduct in-person or virtual interviews with key staff in the applying organizations.
4. Consult other funders, organizations, and philanthropists focused on the same or related cause areas. Obtain insights on the applicant, as they may have also applied for grants from other organizations.

As the Grantee

As the grantee receiving funds, you need to be prepared to have all aspects of your organization reviewed and key documents ready. You are also advised to do your own due diligence on the grantors.

Ways of Doing Due Diligence - Grantee on Grantor

1. Online Research, finding out everything there is to know about the grantor. Research goes beyond the company website and public profiles into sites that give independent perspectives on nonprofits:
   1. Some examples: Candid, Charity Watch, Charity Navigator, GuideStar, GiveWell, ImpactMatters
2. Communicate with other recipients of grants from the organization to ensure your project will be valued and aligned.
3. Consult other funders, organizations, and philanthropists focused on the same or related cause areas for additional insight.

Areas Inspected During Due Diligence:

• The organization’s infrastructure
• How the board manages the organization and its members
• Financial sustainability
• Community engagement - Their position in the community and the field or cause it serves
• Collaboration with other organizations and strategic partnerships
• Organization’s strategy and planning to push its mission
• How goals and milestones are being set, tracked, and evaluated
• How proposed activities and programs align with the funder’s guidelines and priorities
• How proposed activities and programs provide the needed services to the community and advance the field
• How proposed activities and programs compare to other proposals or applications within the same field

To help prepare for your grant application, here is a sample due diligence questionnaire.

When applying for a grant, prepare the following documents:

• Articles of incorporation
• Governance bylaws
• IRS Form 990
• Organizational chart
• Strategic and operational plans
• Budget
• Board meeting minutes
• Financial audit reports
• Program portfolio
• Annual reports
• Press releases/media articles
• Program proposal