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Nonprofit M and A- Getting the Strategy Right

Photo courtesy of Larry Johnson

Mergers and acquisitions is not a corporate strategy one usually associates with the world of nonprofit corporations. During the recent economic downturn, however, many nonprofits have taken a hard look at M&A strategies as a potential critical survival tool for nonprofits in the new millennium.

Introduction:

Mergers in the for-profit world can be a rough and tumble affair. Takeovers are not always friendly and many verge on the downright hostile. Hostile takeovers are not a practical method of expanding your organization in the nonprofit world. The nonprofit corporate structure is a major barrier to aggressive acquisition of another nonprofit organization. There is no stock to buy. Nonprofit boards are prohibited from selling the company, even if it's failing.

If a nonprofit closes, it's assets must be given away to other nonprofits. It is this federal and state requirement that provides one way of expanding a nonprofit corporation while receiving some of the benefits of a for-profit merger or acquisition.

Why Merge?

Building a healthy nonprofit organization requires an eye to good business practices as well as a clearly defined mission. Acquiring the assets of a failing nonprofit or merging with a successful one can have mutual benefits to both organizations including:

  1. Reducing duplication of services: Unlike for-profits, the foundations, governments and philanthropists provide funding for nonprofit services, much like customers pay for for-profit goods and survives. Customers prefer to have multiple companies competing too sell them goods and services. It makes them cost less. Funders, however, see competing nonprofits providing identical services as redundant and less cost-effective. Combining two nonprofits that offer similar services and programs can help the new organization attract funding by demonstrating a desire on the part of the nonprofit to provide the funder with a better bang for his buck.
  2. Taking advantage of economies of scale: A larger organization can consolidate administrative costs and take advantages of vendor discounts for the purchase of things the organizations need to carry on their work.
  3. Creating efficiencies in the operations of the organization's programs: Often small organizations face serious financial challenges in bringing their programs to those who benefit from them. An organization that is struggling to grow its programs with inadequate resources might be able to pull it off were it to be taken under the wing of a parent organization with greater resources. Likewise, two organizations might also have strengths and weaknesses that complement each other and help the blended organizations shore up holes in their operational structure.
  4. Building developmental capacity: Many small nonprofits lack the funding to hire development officers, public relations people and creative staff. Combining operations with one or more nonprofits, merges all of the partners' donor databases as well and can help create the kind of income that allows the new organization to do proper donor development, conduct special events, fund-raisers and targeted marketing of the organization's services and programs.
  5. Sharing management expertise: Organizations with under-trained administrative staff can benefit by merging with well-established organizations with a strong fund-raising program, long history of service to the community and a positive reputation. The smaller organization gains by attaching itself to such an organization. The stronger organization, however, seldom suffers by taking over a struggling smaller nonprofit. The community and its donors see the takeover as a positive thing, since nonprofits are, by definition, owned by the community at large. The takeover appears to the public as a community service to the weaker nonprofit rather than a drag on the one with the positive reputation. Everyone fully expects for things to get better with the troubled nonprofit.
  6. Increasing community involvement. When two or more nonprofits merge, the board of directors of the new organization inevitably absorbs board members from other organizations. Recruiting board members is frequently difficult and in a nonprofit merger, some of the board members of the organizations being absorbed will want to join the reorganized board of directors. At the same time the reorganization provides an opportunity for board members who are burned out to excuse themselves gracefully, leaving behind a stronger, more involved board of directors.

Reasons for a Nonprofit M&A

Nonprofit mergers happen for four basic reasons.

  1. A nonprofit loses funding and needs help to continue its programs.
  2. A nonprofit faces an embarrassing public scandal or public relations crisis and finds continuing its mission untenable.
  3. A nonprofit fails financially and must close its doors and distribute its assets.
  4. Two nonprofits with similar missions merge to reduce duplication of services and to take advantage of the benefits listed above.

While there are no hostile takeovers in the nonprofit world, there are occasions where a large organization in a community takes advantage of its size and position in the community to force another nonprofit out of business in order to protect its share of local philanthropy. In these cases, the aggrieved nonprofit is unlikely to donate its assets to the dominating organization. Though by law the nonprofit must give away its remaining assets when it closes, some other nonprofit will likely receive those assets, especially if there is resentment among the failed nonprofit's board members.

Steps to a Successful Nonprofit Merger:

In general the most effective way to merge two nonprofit organizations is to rewrite the bylaws of the stronger of the two organizations and operate the acquired nonprofit as a division of the parent organization. You will need to do the following:

  1. Research the organization to be acquired. Consult experts regarding potential issues with the merger or acquisition. Do due diligence in ascertaining the details of the proposed joining of the organizations to be merged.
  2. File amended by-laws for the ostensible parent organization to include the acquired program's mission as part of the organization's overall mission. You may need to revisit your mission statement when you do this. File all legal and tax documents related to the merger.
  3. Close the acquired nonprofit organization, formally contribute all the company assets to the new blended organization, pay off staff and disband the board of directors.
  4. Set up quarters for the acquired program, hire staff members that will be coming over with the new program and formally seat any new board members coming over from the old organization.
  5. Work closely with any national certification boards, associations or organizations with which the acquired nonprofit has a relationship to properly transfer those relationships if desired or if such relationships are required to continue the program.
  6. Formally transfer any debts, loans or leases acquired along with the assets of the nonprofit to the new organization
  7. Be careful to secure any and all confidential files and information belonging to the old nonprofit and ensure it is safely transferred to the new organization.
  8. Conduct an public relations campaign to announce the merger of the two organizations and develop marketing materials to support the transition to the new program.
  9. Re-establish the acquired organization's programs with minimal interruption. If you can close down on Friday and reopen on Monday, so much the better.

Conclusion

The nonprofit merger or acquisition is more common than is generally known. Because there is little financial incentive for such acquisitions in the nonprofit world, and because so many mergers happen because one of the partners is in financial difficulty, organizations may make mergers more quietly in an effort not to spook donors or funders. While blending nonprofits has become popular in part because of the country's economic difficulties, M&A strategies are fast becoming a tool for savvy nonprofit boards seeking to strengthen already healthy organizations and to ensure the organization's ability to carry forward their mission into the future.

References

Nonprofit Mergers and Acquisitions: More Than a Tool for Tough Times

Guidestar: Will Mergers and Acquisitions Be the Nonprofit Wave of the Future

Aronson Nonprofit Report: Guidance on Nonprofit Mergers and Acquisitions