Private foundations hold real power to shape communities, fund research, and support causes that matter. That power comes with a duty to give grants thoughtfully and within the boundaries the IRS sets for tax-exempt organizations. A foundation that skips careful review of its grantees risks more than a wasted check; it risks its own tax status, its reputation, and the trust of the people it serves.
What Due Diligence Means in Grantmaking
Due diligence is the process a foundation uses to check a potential grantee before money changes hands. It covers legal status, financial health, mission fit, and the ability to carry out the proposed work. Many program officers think of due diligence as paperwork, but it also builds trust. A foundation that asks clear questions and explains its process treats grantees as partners rather than applicants under suspicion.
6 Core Elements of Grantmaking Due Diligence
This article walks through the core elements of grantmaking due diligence and shows how each one protects both the foundation and the organizations it funds.
1. Confirming Legal & Regulatory Standing
Every grant starts with a status check. Foundations should confirm that a prospective grantee holds valid 501(c)(3) status or another qualifying designation, using IRS records or a service such as Candid. Grants to organizations that are not public charities, including many foreign groups, call for expenditure responsibility. That means a pre-grant inquiry, a signed grant agreement, separate accounting for the funds, and regular reports from the grantee. Foundations also need to screen grantees against watchlists maintained by the Office of Foreign Assets Control to avoid inadvertently funding a sanctioned organization.
2. Aligning Grants with Mission & Strategy
A grant can meet every legal requirement and still miss the mark if it doesn’t serve the foundation’s goals. Program staff should look at whether a grantee’s work fits the foundation’s priorities and whether the organization has a track record of results in that space. Effective grant management also asks how a single grant fits into the larger portfolio. A foundation funding education reform, for example, gains more from a grant that complements existing initiatives than one that stands alone.
3. Reviewing Financial Health & Governance
Numbers tell a story, and audited nonprofit financial statements, IRS Form 990 filings, and annual budgets reveal whether an organization can manage the funds it receives. Reviewers should look for steady revenue, manageable debt, and spending that matches the mission. Governance matters just as much. A capable board, clear policies, and open reporting practices point to an organization built to last. Foundations should also confirm that a grantee has a conflict of interest policy on paper and that no board member or staff member stands to benefit personally from the grant.
4. Assessing the Ability to Deliver
A mission match and clean finances still leave one question: can the organization actually do the work? Reviewers should look at staffing, systems, and past project outcomes. A small nonprofit taking on a project far larger than anything it has managed before may need extra support or a smaller initial grant to test its capacity. Sustainability planning also deserves attention, since a foundation wants its funding to leave lasting change rather than a program that ends when the grant does.
5. Weighing Risk Before the Grant Goes Out
Every grant carries some risk, and naming that risk early lets a foundation plan for it. Reputational risk, political risk in the grantee’s operating region, shifts in federal funding for nonprofits, and sector-specific challenges all deserve a place in the review. A foundation working internationally, for instance, might face regulatory hurdles that a domestic grant would never raise. Building a mitigation plan for each identified risk turns a vague worry into a manageable part of the grant agreement.
6. Keeping Records That Hold Up
None of this work matters if it isn’t documented. Foundations should keep clear records of every review, agreement, report, and conversation tied to a grant. Good recordkeeping supports IRS reporting, makes external audits smoother, and preserves the reasoning behind past decisions for future staff and board members.
Working with BPM
Grantmaking due diligence touches tax law, finance, and program strategy all at once, and few foundation teams have the bandwidth to cover every angle on their own. BPM serves the nonprofit industry, working alongside foundations to build due diligence processes that hold up to IRS scrutiny while keeping the grantee experience respectful and clear.
From verifying tax-exempt status to reviewing financial statements and drafting expenditure responsibility agreements, BPM supports foundations at every stage of the grantmaking cycle. If your foundation wants to strengthen its due diligence process or review its current grantmaking policies, contact us to start the conversation.