How to keep negotiations on track
Organizations that are considering a merger usually create a joint merger committee to negotiate an agreement. Ultimately this committee has a clear-cut agenda — to vote either "thumbs up" or "thumbs down" on joining the two organizations.
Making this decision can involve months of negotiation, however, and conversations can easily get derailed. To stay on track, be sure to cover the following core topics.
1. The merger committee's purpose
To begin, remember that a merger committee can't authorize a merger. That right is reserved for the boards of the affected organizations.
What the merger committee can do is craft a compelling deal — or recommend that the organizations respectfully walk away from each other. Ironically, the committee's lack of final authority gives it the freedom to hold wide-ranging discussions and explore every possibility for working together.
2. The merger committee's membership
A merger committee typically includes the executive directors or chief executives and board chairs of both organizations. "You need to consider the dynamics of your merger committee," says Richard Litchfield, chief executive of UK nonprofit management consultancy Eastside Primetimers. "You need a combination of both non execs and execs. One of the chief executives might be losing their job at the end of the process so you need trustees involved. Equally, the committee can't just involve trustees as they're not going to be managing the operations, both internally with staff and externally with funders."
To promote this team's credibility, also include another member of your board or management team who has a talent for creative dissent. The process of resolving disagreements can lead to creative thinking and options that might otherwise get overlooked.
Many nonprofits hire a consultant to lead merger committee meetings. Another option is to appoint one co-chair from each organization — probably your respective board chairs. To reinforce the principle that mergers are ultimately a board function, don't ask your executive directors or chief executives to run the meetings.
3. The time frame
David La Piana, consultant and author of two books on nonprofit mergers, states that four to six months of active engagement between two organizations is usually enough to complete a negotiation.
Keep in mind, though, that reaching a merger agreement is only the first step. The legal implementation of a merger and full integration of two organizations can take months — or even years.
4. The first meeting
La Piana recommends that you set aside four to five hours for the merger committee's initial meeting. It can take that long to create a road map for the entire process.
More specifically, make time to:
- Introduce the participants
- Give overviews of both organizations — their history, funding, programs, services and accomplishments
- Review each organization's reasons for exploring a merger and desired outcomes
- Brainstorm issues — the questions that must be answered before everyone in the room can vote on a merger
- Rank those issues from potential deal breakers to matters that can be saved for after the merger
- Begin a discussion of the most critical issues
- Schedule further meetings
5. Governance questions
After the first meeting, start tackling the "big picture" issues of mission, vision and direction for the newly merged organization. For example:
- Will the merged organization have new mission and vision statements? If so, who will create and adopt those statements?
- Who will be on the board of the merged organization, and who will act as chair?
- Will the organization have new bylaws? If so, how will they be created and adopted?
- How will you legally structure the merger — by dissolving one organization into another or into a new organization, transferring assets, forming a parent-subsidiary relationship or creating interlocking boards?
- What will be the name and logo of the merged organization?
- What will be the effective date of the merger?
6. Financial questions
Consider key financial questions. For example:
- What will be the new organization's sources of revenue?
- Do the organizations currently have an overlap in donors and funders?
- How will those donors and funders view a merger of the organizations?
- Which of your current programs and services will continue to be funded?
- Will you offer new programs and services? If so, how will they be funded?
- Do the organizations have outstanding debts?
- Do the organizations have any pending lawsuits or other legal expenses?
- Will you need to invest in new hardware, software, equipment or office space?
- Do the organizations have adequate insurance, including directors and officers coverage?
7. Staffing questions
Think carefully about who will work in the merged organization. For example:
- Who will become the executive director or chief executive?
- Will one of the current executive directors or chief executives remain in the new organization but have a different role?
- What will happen to other members of your management teams?
- Will any staff members lose their jobs after the merger? If so, how will you maintain morale and handle severance?
- What personnel policies and procedures will you use?
- How do your salary and benefit levels compare to those of your partner?
8. Property questions
Also think about where the people in the merged organization will work. For example:
- What will happen to the properties that your organizations currently own or lease?
- Where will your merged organization be located?
- Will that organization have more than one location? If so, which one will function as headquarters?
- Will you maintain your current office spaces or find a new one?
- Do you need additional office space?
9. Due diligence
Due diligence involves the exchange of any documents that could affect a decision about whether to merge. Examples include:
- Incorporation papers and bylaws
- Budgets, tax filings and other financial statements
- Lists of grants and gifts from individual donors
- Job descriptions
- Lists of employees and their compensation
- Leases, deeds and mortgages
The purpose of due diligence is to avoid unpleasant surprises such as a pending lawsuit or government investigation. Consult a lawyer who specializes in nonprofit mergers in your area to help with this step.
10. The end game
Document the ongoing agreements reached by your merger committee and share this information with the boards of both organizations. The merger committee's work is done when those agreements add up to a deal that the participants can accept — or a recommendation not to merge.
Remember, however, that a merger agreement is a statement of intent — not a legal document. You'll need a lawyer to transform the agreement into the documents that are required for nonprofit mergers in your area.
If your boards ultimately decide against a merger, don't assume that the merger committee's time was wasted. The process of exploring a merger offers benefits of its own — learning more about your organization, expanding your network and discovering other ways to collaborate. Whatever the results, a merger negotiation is a path to organizational renewal.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.
CompassPoint: The M word: A board member's guide to mergers by Alfredo Vergara-Lobo, Jan Masaoka and Sabrina L. Smith (2005)
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)
Eastside Primetimers https://ep-uk.org/