Historically high inflation and government funding cuts have prompted many nonprofits to scramble for ways to ensure their long-term survival. One avenue of increasing interest is merging with another organization. Mergers can provide many benefits, but success requires careful planning and consideration.
Merger motivations
Survival concerns aren’t the only reason nonprofits merge, of course. Your organization might consider a merger to create additional revenue sources. This could be accomplished by combining with an organization that has, for example, stronger donor networks or more robust revenue-generating programs.
Mergers can also help organizations reduce overhead and improve efficiency through streamlining. By sharing staff and equipment and cutting costs, you can downsize to a single facility. By combining your purchasing power, you can negotiate lower rates, discounts, and better vendor service.
Nonprofits also pursue mergers to expand their missions. If the two groups overlap on missions and populations served, they can grow their client base while reducing competition for limited funding. Alternatively, a nonprofit might seek a merger with an organization that can add services or programs for existing clients. For instance, an organization that helps homeless people find housing could join forces with a nonprofit that helps the same population find jobs.
5 matters demanding attention
Even if your organization has sound reasons to engage in a merger, several matters demand attention before you proceed, including:
1. Staffing implications. A merger will likely lead to redundancies and staff cuts, which can hurt morale. You might also lose crucial institutional knowledge and garner negative attention for dismissing employees for reasons beyond their control. You’ll need to handle workforce reductions with sensitivity. Transparency and communication are essential. Consider ways to keep cherished former leaders involved, perhaps as board members.
2. Potential donor issues. When you merge, long-term donors may feel your mission is shifting in ways they don’t support or are less invested in. You might lose donors because you’re eliminating a specific program they’d like to see continue. You must also be aware of any donor restrictions. If the organization you merge with has received restricted donations, you may need to solicit permission from the donors to use the funds once the merger is complete. If donors aren’t on board, it could result in costly litigation.
3. Possible costs. Mergers between nonprofits are much less likely to involve a cash exchange, which is typical of for-profit transactions. However, nonprofit mergers can include expenses related to:
· Professional services of attorneys, financial advisors and various consultants,
· Rebranding campaigns,
· Moving offices and other facilities,
· Lease buyouts,
· Lost funding, and
· Severance pay.
You might need to raise salaries to achieve pay parity in the combined organization. You may also need infrastructure upgrades, including new systems and IT equipment. These expenses will likely consume cash flow in the short term.
4. Culture clashes. Nonprofit mergers that appear foolproof on paper can fail due to cultural clashes. You’ll want to ensure the organizations are compatible in terms of leadership styles, remote work policies, and the desired level of employee input. Long-tenured employees may be more resistant to change. Establish early on that the organizations are aligned on values, priorities and goals.
5. Succession plans. Many nonprofits lack a succession plan. Even if one or both merging organizations have a plan, a revised plan will be necessary and may require some negotiation. Given everything that needs attention before, during and immediately after a merger, you might be tempted to put off succession planning. However, delaying succession planning is a mistake. It takes time to identify and groom successors; unexpected departures can rock your organization if you're unprepared.
Tread carefully
Nonprofit mergers can reduce costs, produce efficiency synergies, and facilitate expanded missions. They’re not a small undertaking, however. Contact Hood & Strong to help you weigh your options and take the steps to set you on a successful course.
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Sidebar: Beyond Mergers: Other Options for Collaboration
The legal definition of “merger” generally refers to a transaction where one organization absorbs all of another organization’s assets, rights and liabilities, and the absorbed organization no longer exists as a legal entity. Nonprofits might, however, consider similar — but different — collaborative arrangements that stop short of that definition.
For example, some states allow consolidations, where both organizations are “merged out,” leaving an entirely new entity. (The new entity would need to apply for tax-exempt status.) Another possible option is to form a parent-subsidiary (or affiliation) arrangement. The so-called parent doesn’t own the subsidiary but controls it — for example, through the right to appoint the board of directors. Also, the parent doesn’t assume the subsidiary’s liabilities. Each nonprofit functions separately.
Finally, an asset acquisition occurs when one nonprofit acquires identified assets and liabilities from another. If the transferring organization's creditors are paid in full, the transaction can generally be structured as a gift from one organization to the other.
