Is a Merger Right for Your Nonprofit?
- August 16, 2023
- Posted by: Hood & Strong
- Category: Audit & Assurance
Deciding whether to merge with another nonprofit isn’t a straightforward decision. Although some nonprofits struggled through the COVID-19 years, others prospered. Now, with high inflation rates and a possible recession, many nonprofits are again left with questions about their futures. A merger can help organizations share expenses and weather economic storms. But there are also potential drawbacks.
Successful mergers are based on a foundation of solid motivations. For example, you might decide to merge to establish the stability that makes it easier to pursue your mission. Such a union could lead to a stronger organization better able to survive difficult times. You also might want to merge to reduce the competition for funding, which could intensify as cash-strapped state governments cut back on their nonprofit grants and contracts in the wake of the pandemic.
A merger can help nonprofits achieve economies of scale that will make the merged organization more efficient, too. This might come, for example, from combining infrastructures — everything from staffing and board leadership to administration, information systems, human resources and accounting. A merger could also give you access to a wider network, as well as more perspectives and experiences to base decisions on. And it might enable you to provide more programming or add locations.
For all of the worthwhile reasons to consider a merger, it’s important to remember that some mergers fail. One common reason is that the merger itself, as well as the new organization, can cost much more than expected. In the short term, for example, you’ll need to finance transactional and integration costs.
Over the longer term, larger and more complex organizations generally incur greater costs than smaller ones. Moreover, any dollars saved by a nonprofit typically are invested in programming because the demand for services is always there. Improved efficiency — not reduced costs — should be the driving force behind a proposed merger.
Arrangements intended to “rescue” a failing organization are another red flag when it comes to nonprofit mergers. In this scenario, you usually see a larger, more stable nonprofit swoop in to save a smaller counterpart. Despite its weaknesses, the smaller nonprofit usually has something to offer, such as loyal donors or lucrative government contracts. But a merger isn’t likely to solve problems such as poor leadership or business practices. The better approach in such a situation is for the larger nonprofit to acquire assets, or viable pieces, of the smaller organization. These can enhance the acquiring nonprofit without adding liabilities.
Finding merger candidates
If you decide to proceed with a merger, start the process by identifying a likely candidate with which to combine forces. A misstep easily could doom a merger to failure. What should you look for? First and foremost, both organizations should share similar missions, values and cultures. If these aren’t aligned, it will prove nearly impossible to unite around a common vision for the future.
That doesn’t mean you have to offer duplicative services, but they should at least complement each other. For example, an organization that helps the homeless find housing might team up with a nonprofit that provides employment services to the economically disadvantaged. If you find yourself constantly competing with an organization for resources, odds are you’re well aligned.
Deciding whether to merge your nonprofit with another is a big decision. Before making it, contact your Hood & Strong NFP team. We can help coordinate the experts you’ll need for contract negotiations, financial and legal due diligence, and integration management.