During the COVID-19 pandemic and economic recession, it is important to take a hard look at a merger for your nonprofit.
Just about every nonprofit has been profoundly affected in some way by the COVID-19 disaster. If yours nonprofit is open to serve clients, you may be scrambling to bear the costs of PPE and meeting increased demand. If you are closed, you may be working to keep people on the payroll until you reopen or even questioning your viability as an organization. Whatever the case, our current time challenges our resourcefulness, creativity, and even courage.
It is always a good idea for nonprofits to periodically discuss mergers as a part of strategic planning, but now more than ever it may be less about long-term strategy and more about short-term action to ensure survival. In normal circumstances, there may or may not be compelling reasons to explore merger with another nonprofit, but even if the reasons are not there, the nonprofit will benefit by having this internal conversation. In these dark times, the merger option is at least worth another careful review.
How to approach the merger discussion
Regardless of pandemic-timing, nonprofits leaders considering a merger should take a dispassionate look at their mission, financial condition, and difference they are making and explore:
- Are we the best entity to be doing what we do? ·
- Who are our competitors in the same or similar space? ·
- Could we expand our impact and improve operational efficiencies by merging, partnering or collaborating with another organization? ·
- Would our community be better served by such a collaborative arrangement? ·
- Would a merged organization be stronger/more sustainable than two (or more) individual ones? ·
- Will our major funders support a merger? (They almost always do.)
Nonprofit mergers are nothing new, but they are rare
In its 2013 paper Nonprofit Mergers: A Strategic Tool for Impact and Sustainability, Greenlights for Nonprofit Success (now Mission Capital) reported that less than 1% of Austin, Texas (MSA) nonprofits had merged. In another survey, about 1.5% of nonprofits in four states had merged. While the report cited their potential benefits of mergers, mergers are uncommon, if not rare. Do nonprofits fail to consider merger out of entropy, a lack of strategy, timid or threatened leadership, or other factors?
COVID-19 has changed the urgency and interest in nonprofit merger considerations
Recent surveys by Mission Capital and La Piana Consulting indicate that, while mergers are not necessarily increasing, a lot more nonprofits are considering mergers as a strategy for addressing the disruptions and challenges brought on by the pandemic and resultant economic downturn. Mission Capital asked survey respondents: “As a result of the COVID-19 pandemic, what operational ramifications has your organization experienced to date?” Out of 200 responses, 30% had engaged in strategic partnerships with other organizations. In its survey of nonprofits, La Piana found that 23% of 233 respondents were considering merger.
The COVID-19 pandemic and consequent economic recession has exposed weaknesses at most levels in society. Not only has the utter failure of federal leadership and crisis preparation been starkly revealed, but also the weaknesses of businesses and organizations have been on display. Some commercial industries (e.g., cruise ships, airlines, movie theaters, theme parks, restaurants, sporting events, commercial real estate) have been severely curtailed and are being forced to re-evaluate what the other side of the pandemic may look like. The larger, more established ones (e.g., airlines, restaurant chains) will likely survive (with considerable government subsidy), while smaller, less capitalized operations (e.g., local restaurants, small retail) may go away in great numbers. The recent trend of large corporations consolidating and gaining larger market share will likely continue.
How hard has the social service sector been hit by the COVID-19 disaster?
In the social sector, the status of many nonprofits is even more vulnerable during this pandemic. Despite an initial infusion of government subsidies through the CARES Act, nonprofits are living on the edge. Typical nonprofits do not maintain large cash reserves and do not have the access to capital enjoyed by for profit entities. Thus, their staying power is weak when a pandemic forces them to close for significant periods. A recent survey by the National Association for the Education of Young Children is a graphic example. It’s findings from surveying 5,000 child-care providers: ·
- Approximately two out of five respondents—and half of those who are minority-owned businesses—are certain that they will close permanently without additional public assistance.
- Nationally, 18% of child-care centers and 9% of family childcare homes remain closed. Of those who are open, 86% of respondents are serving fewer children now than they were prior to the pandemic.
- On average, enrollment is down by 67%.
- At the same time, upwards of 70% of child-care centers are incurring substantial, additional costs for staff (72%), cleaning supplies (92%), and personal protective equipment (81%).
- One in four early childhood educators reported that they have applied for or received unemployment benefits, while a full 73% of programs indicated that they have or will engage in layoffs, furloughs, and/or pay cuts. For minority-owned businesses, the situation is worse; only 12% have not resorted to these measures in order to survive.
Nonprofit survival predictions: The weak will disappear; the strong and innovative will make it
Those are stunning statistics, but, sadly, probably not too different from other parts of the nonprofit sector. So, will this crisis result in new opportunities for innovation (consolidations, partnerships, and mergers) leading to better societal outcomes, or will there be a crippling downsizing of nonprofit organizations and services that will take years to rebuild? I fear that the answer is “both”.
On the positive side, the nonprofits that went into the pandemic with a solid business model (e.g., established government contracts, diverse funding, earned income), strong cash reserves, and innovative leaders can come out stronger. There will be new opportunities to address social sector vacuums created when weaker nonprofits are forced to cut back services or go out of business. Entrepreneurial leaders will broaden their reach and impact by filling those vacuums, creating new collaborative relationships, absorbing programs of smaller nonprofits, and/or merging with nonprofits with similar missions.
On the other side, nonprofits that had just been getting by may be faced with a number of bad choices. If a dysfunctional Congress does not supply adequate subsidies throughout the pandemic, nonprofit leaders may have to consider downsizing, furloughs, layoffs, or dissolution. And these decisions are often in a climate where the costs of safety measures are rising for any nonprofits dealing directly with the public. Frankly, some nonprofits – ones that do important work – that have questionable/unsustainable business models should not continue. They should distribute their assets to more viable nonprofits that can possibly continue that work; the need for their services will not go away, and another organization may fill the void.
When a pandemic-driven merger is a good idea
Is merger a good solution when nonprofit re-alignment is caused by a major shake-up like a pandemic or recession? Possibly, but mergers will remain a solution in a limited number of cases. In addition to the questions asked, above, an organization might ask the following to help discern whether merger exploration could be a strategic move in response to the pandemic: ·
- Are there new funding sources out there? (E.g., grant opportunities to address racial injustice, funding for PPE and other safety measures) ·
- If we are in a financially precarious situation, is there a more stable organization in our space who could take over for us? ·
- If we are in a position of financial strength, are there struggling organizations in our space that we might acquire? ·
- Have any entities in our space closed down, and has that created a vacuum that we might fill?
- If we find the right merger partner, will we be able to afford (or raise the funding for) the additional costs of merger plus the integration of the organizations?
While a merger or other strategic partnership may not be right for your organization as a response to the pandemic, I encourage your leadership to have the conversation. It could inspire a new and innovative approach to serve your community more effectively.