Nonprofit Mergers: Approach with Caution
Crowded and competitive—two words that business leaders regularly hear and think, “consolidation.” But does the same hold true for leaders in the U.S. nonprofit sector? Actually, it often does.
Consider that the number of tax-exempt, mission-driven organizations jumped by nearly 12 percent from 2003 to 2013, according to the National Center for Charitable Statistics. In other words, over the span of 10 years, a sector chronically challenged by funding shortfalls experienced a period of sustained growth—but without a complementary rise in financial support, and with the added pressures of recessionary austerity. Government grants have declined, private donations have increased only marginally and more nonprofits of all shapes and sizes are left competing for limited funds, all while working to meet a growing demand for their services. Crowded out, many now lack the resources and scale they need to achieve their mission and deliver the impact they are striving for.
With pressures abound, nonprofits are actively looking for partnership opportunities—from joint ventures, to alliances, to informal resource-sharing arrangements—to drive efficiencies, cut costs and strengthen their programs and outcomes. Not to be overlooked in this range of strategic growth opportunities are nonprofit mergers—arguably the most intensive, expensive and difficult to execute of all these options. As a result, they’re often avoided. In fact, only four percent of U.S. nonprofits reported plans to merge with another organization last year, according to the Nonprofit Finance Fund’s 2015 State of the Nonprofit Sector Survey.
There’s no denying the pervasive challenges that come with nonprofit mergers—from liquidity and funding issues, to governance and integration snares, many of these arrangements fail even before they get off the ground. Still, despite their difficulties, successful mergers can afford organizations both large and small the opportunity to achieve greater scale and realize long-term sustainability, especially when organic growth channels are exhausted. What’s needed for mergers to succeed is foresight into the pitfalls that typically undermine them. With that in mind, if your nonprofit is considering whether or not to merge with another organization, be sure to account for these downside risks and hurdles from the outset:
Formally combining two organizations—two distinct missions, visions, cultures, teams and sets of leaders—is no easy feat. The scope of the decision and its ensuing challenges breed reluctance and aversion at many nonprofits, and this hesitation remains one of the driving forces that undermines mergers.
More often than not, smaller organizations view mergers as a ripcord—a last ditch compromise or kneejerk survival reaction in the face of imminent financial duress. From a leader’s perspective, the reluctance makes sense. Very few wish to relinquish control, which is often falsely and irresponsibly stigmatized as accepting failure. But ideally, the decision to merge organizations should come well before either one is in dire financial straits. A comprised nonprofit is rarely a sound partner, as it often brings volatility and misalignment.
Instead of waiting until the eleventh hour, all partnership arrangements—and especially mergers—should be pursued before the storm clouds begin to gather.
Faulty due diligence:
Every merger demands intensive due diligence. Whether your nonprofit is larger, smaller or of equal size to the organization with which it’s looking to combine, success boils down to targeting and vetting. Your organization’s ultimate goals must be the primary driver of your partnership strategy; they determine whether a merger is the best approach in the first place, and then help you screen your list of target partners.
Whether you plan to approach a targeted organization, or a nonprofit has reached out regarding a potential merger, begin by asking yourself the right high level questions to vet the opportunity:
- Will a merger meet our long-term strategic goals and provide sustainability?
- What assets and liabilities does the other organization bring?
- Are its funding and revenue sources diversified and reliable?
- What are its governance and leadership structures?
- Do our missions align? Do our services overlap? Are there potential synergies?
Failure to answer these questions from the outset can introduce faulty decision-making early on in the vetting process, as well as unforeseen logistical issues later on. Be sure to fully involve your Board and leadership as early as possible, as their big picture perspectives and buy-in will be critical to the success of any partnership initiative.
Not enough money to save money:
Even with the best intentions to cut costs, boost efficiencies and generate new money via a merger, organizations need to be realistic and discerning about their finances well before diving into the process. This year’s Nonprofit Finance Fund survey found financial health indicators have recently improved for many nonprofits, but a resounding 53 percent still report three months or less of cash-on-hand.
In other words, not only are their operating budgets often limited, but the majority of organizations have little cash in reserves to invest in costly and uncertain ventures. Considering that mergers often cost tens of thousands of dollars to execute, and can take more than two years to finalize, the necessary capital expenditures can introduce significant liquidity risks to organizations that fail to plan accordingly for high planning, execution and integration costs, as well as intangibles.
What’s more, mergers can fundamentally shake up the legal status of organizations, which in turn can affect their grant eligibility, endowment restrictions and other funding capabilities. Not only that, but they can also alienate donors and supporters if these stakeholders are not properly engaged and provided with transparency throughout the process.
Integrating two unique cultures is a lynchpin for success in every merger. While timing, due diligence and financial resources help newly-merged organizations achieve alignment, actually synthesizing their cultures—different board governance styles, different management styles and different sets of expectations around outcomes and financials—comes down to a steadfast commitment from both organizations’ leadership. Not only do roles and responsibilities need to be transitioned, but these intangibles also need to be acknowledged, communicated and reconciled. Especially when a stronger nonprofit combines with a weaker organization (be it financially weak, poor managed, or a combination of the two), the weaker organization should be consistently reassured that the merger will help continue its important work with greater scale and more resources to better serve its communities.
Overall, organizations maintain a healthy sense of caution around the investment and challenges inherent to nonprofit mergers. Though rife with risks, when handled with a strategic approach to timing, liabilities and finances, they can provide organizations with a unique and impactful avenue for strategic growth in the face of an intensely competitive nonprofit industry.