View a possible merger with your eyes wide open
Conventional thinking holds that nonprofit mergers are reactive and driven by a struggle for survival. And survival IS an issue for almost 30% of nonprofits. Yet it's also possible to see mergers as a viable strategy, even when organizations are flush and functional.
Is a merger a smart move for your organization? Here are key points to keep in mind as you answer this question.
1. Look to long-term benefits — not short-term savings
David La Piana, a consultant who specializes in nonprofit mergers, believes that mergers are a strategy to consider when:
- Your programs and beneficiaries overlap with other nonprofits serving the same community — leading to market saturation and loss of identity for all the organizations involved
- Your organization needs more capacity to compete with for-profit businesses and you can't achieve it through informally cooperating or collaborating with other nonprofits
- Your organization has "lost steam" in fundraising, program development or service delivery, a situation many nonprofits find themselves in during this pandemic.
If you're looking for a way to save costs in the short-term, however, a merger may not be your best option. Mergers cost money — sometimes a lot. Potential expenses include legal fees, consultant fees, severance pay for employees who lose their jobs, moving costs, and investments in new technology, services and programs. That said, in these difficult times, you may be able to find board members or supporters who provide merger-related services to your nonprofit, pro bono.
According to La Piana, the real benefits of a nonprofit merger occur over the long term. These include:
- A higher public profile
- Greater market share and political influence
- More strategic fundraising
- A larger and more diverse staff with a greater range of skills
- The capacity to create new services while improving existing services
- Greater efficiency through shared assets and reduced overhead
- Growth through expansion into new communities
Also remember that foundations, government agencies and private funders are sometimes willing to underwrite the costs of merging and integrating newly joined organizations.
2. Look for conditions that promote successful mergers
The Bridgespan Group studied nonprofit mergers in four U.S. states over an 11-year period. They concluded that the organizations most likely to benefit are those that:
- Compete with other nonprofits to offer similar services in the same community
- Are "asset intensive" — dependent on skilled employees and ownership of large facilities (such as schools)
- Are bound by regulations that dictate how services are reimbursed, staff members are certified and facilities are licensed
These conditions can create barriers to growth that are best overcome by mergers.
3. Consider the various options for a merger
A merger ultimately requires two organizations to align their strategies and consolidate their boards. Even so, the word "merger" describes several paths to becoming legally unified:
- Outright mergers dissolve one corporation into another, or both corporations into a new entity.
- Asset transfers allow one organization to "sell" its money and property to another organization.
- Parent-subsidiary relationships maintain separate corporations, though one organization legally controls the other.
Organizations can also form interlocking boards as an interim step to a more complete merger. One set of board members guides both corporations, even though they remain legally separate.
These options come with separate risks and rewards. To determine what's best for your organization, consult a lawyer who specializes in nonprofit mergers in your area. Also talk to other nonprofit leaders who've negotiated successful mergers and ask for their suggestions.
4. Plan for a transition
In one sense, mergers are straightforward. You negotiate an agreement, file the necessary legal documents and wait for final approval.
Truly integrating two organizations, however, is a different matter. It means unifying all of your operations — systems, programs, services, management teams, board members, staff members, volunteers — and your corporate cultures. This is a process that can take months or even years. The legal implementation of the merger is only the first step.
5. Remember the unique nature of nonprofit mergers
Sometimes the driving force for a merger comes from board members or executive directors who've had favorable experiences with mergers and acquisitions in the private sector. However, the driving forces for many of those mergers — to acquire more equity and reduce administrative costs — are less relevant for nonprofits.
6. Avoid crisis-driven mergers - when you can
It's true that some nonprofits turn to mergers only as a last resort — after the loss of funding or a lack of leadership (or a COVID-19 related financial crisis). Events such as these can prompt a hasty search for a partner and a merger of two organizations that may not be a good fit.
If you must rush, search widely for potential partners, vet them thoroughly and carefully negotiate a "win-win" agreement.
7. Consider alternatives to a merger
"There are a wide range of partnerships, other than mergers, that can be very valuable to nonprofits," explains Richard Litchfield, chief executive of UK nonprofit management consultancy, Eastside Primetimers. "Working in collaboration is a good first step for organizations which are considering a merger, as it allows them to assess whether it is the right option for them." Other forms of partnerships include:
- Cooperation: sharing information about best practices in your field, pending legislation, discounts for technology purchases and other key topics
- Collaboration: pairing up to expand your current services and programs
- Joint venture corporations: forming new organizations to offer additional programs and services
- Administrative consolidation: restructuring to share payroll, human resources and other "back office" functions with another nonprofit
The bottom line: Don't pursue a merger simply because an influential board member or charismatic leader thinks it's a good idea. Go into a merger with your eyes wide open, convinced that it's the most viable new option for aligning with your mission and achieving your organization's goals.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.
The nonprofit mergers workbook part I: The leader's guide to considering, negotiating, and executing a merger by David La Piana and Robert Harrington (2008)
The nonprofit mergers workbook part II: Unifying the organization after a merger by La Piana Associates (2004)
DeLoitte M&A Institute: Nonprofit mergers: Five keys to unlocking value (2013)
Bridgespan Group: Nonprofit mergers and acquisitions: More than a tool for tough times by William Foster, Alex Cortez and Katie Smith Milway (2009)
Eastside Primetimers: https://ep-uk.org/