Due diligence for grantmakers: 6 best practices

In the mission to power positive change through philanthropy, grantmakers deal with the crucial challenge of selecting grantmakers who represent a good fit for their investment. It goes beyond a good application form and proposal. It often requires insight into the granseeker’s mission, strategy, history, reputation, finances, capacity and more.

It’s important to know your grantee well and understand how the funds will be allocated. All this makes due diligence essential for grantmakers. 

What does due diligence mean?

Due diligence, a common term in business and finance, refers to how a potential investor learns about an organisation’s overall vision, health and methods. The understanding gleaned from this learning process guides an investment decision. 

Likewise, in the grantmaking context, due diligence refers to the thorough investigation and assessment of potential grantees before awarding funding. It enables grantmakers to determine the suitability of the potential grantee for the grant and the risk associated with the nonprofits and projects they’re considering funding. 

At its core, due diligence is more about learning than simply fulfilling a legal requirement.

Due diligence is vital to grantmakers because it 

• Demonstrates responsible stewardship of funds
• Guarantees alignment with their values and objectives 
• Mitigates risks and increases the chances of optimal use of funds
• Ensures compliance with legal and regulatory requirements

6 due diligence best practices for grantmakers

Check out these six best practices in practising due diligence for your grantee and funding decisions. 

1. Ensure alignment of mission goals

The first item on the due diligence checklist for grantmakers is to confirm the alignment of your values, mission and goals with the potential grantee. This practice will guarantee that the projects and programs considered by the potential grantee are in line with your priorities. Also, it leads to more impactful philanthropic investments. 

To gather information about the mission and goals of grantseekers, it’s important to check out the organisation’s official website and to contact the organisation directly through emails or phone calls for more information.

Consider researching their grant application, periodic publications, media coverage and even social media channels; these can provide valuable information about their work.

2. Examine organisational governance

Assess the organisation’s governance and leadership structure and practices. Grantseekers should have a qualified team of leaders; their governance policies and practices should also be compliant and ethical. With effective governance comes successful project implementation, organisational agility and healthy stakeholder relationships.

To thoroughly investigate grantseekers’ governance and leadership, 

• Request a list of board members from the grantee
• Evaluate the composition of the board with diversity, expertise, size, independence, meeting frequency and decision-making processes in mind  
• Review the organisation’s governing documents for a grasp of the leadership roles and responsibilities 
• Check for policies to identify and manage conflicts of interest among board members and other key staff 

3. Check financial and operational viability

It’s important to understand the general health of the potential grantee, and you can do this by assessing the financial stamina and operational capacity of the organisation. 

Information about a nonprofit’s financial health shows its ability to sustain its operations over the long term. It also highlights the organisation’s financial accountability and responsibility. On the other hand, checking its operational capacity ensures that it has the infrastructure to execute planned projects effectively. 

To effectively gauge the grantseeker’s financial health, it’s necessary to review audited financial statements, budgets and financial projections. Consider assessing the nonprofit’s key financial ratios and cash flow statements. 

To examine its operational capacity, evaluate the nonprofit’s structure and determine whether the staff have the expertise to handle proposed programs. Consider their use of technology and organisational culture. It’s important to also inquire about their capacity-building efforts.

4. Evaluate past programs

It’s also a good idea to evaluate the nonprofit’s previous programs. This gives you a concrete idea of the impact of their work. If proof of positive outcomes exists, the nonprofit can produce remarkable results when funded.

The assessment of past programs shows a track record of the organisation’s strategies over time and how well it adapted its programs in the face of changing circumstances. Records of multiple successful programs can enhance the nonprofit’s credibility and build the grantmaker’s trust. 

5. Conduct legal and compliance checks

It’s crucial to verify that the nonprofit complies with all relevant laws. To begin with, it should be registered as a nonprofit. If it isn’t registered, it should at least enjoy fiscal sponsorship from a registered nonprofit.

Verify its tax exemption status and ensure the organisation has the necessary permits and licences to operate. Research any legal disputes involving the nonprofit and evaluate their potential impact on the organisation. It’s also important to inquire about its engagement with legal counsel to be sure they have expert guidance.  

If the nonprofit deals with sensitive information, it’s ideal to check out its compliance with data protection laws and ensure that it complies with counterterrorism laws and regulations.      

6. Assess risks

Investigate the potential risks of funding the nonprofit. Financial risk assessment enhances the chance of project success and reduces the possibility of misuse of funds.   

Reputational risks are a concern too. Consider conducting media searches and discussing with sources to confirm the legitimacy and reputation of any partnering or grantee organisation.  

This due diligence checklist for grants can help you solidify your funding decisions and maximise your grantmaking impact. And, it’s worth noting, due due diligence is more than asking for basic information. Follow these best practices and take active steps to learn about potential grantees.