Strategic challenges affecting both nonprofits and commercial organizations
Although nonprofits have a different financial model than for-profit businesses, they also tend to be founded by entrepreneurs: pioneering individuals who organize, operate and grow the organization, taking on greater-than-normal career risks to do so. And like businesses led by commercial entrepreneurs, nonprofits led by social entrepreneurs will occasionally arrive at a significant crossroads — succession at the end of the founder’s career, an opportunity to absorb a similar organization, or changes in the economic fundamentals that once helped them thrive. In these cases, merging nonprofits should be considered a viable and sensible option.
Challenges and benefits of nonprofit acquisitions
Once seen as a last refuge for struggling nonprofits, the M&A process is today widely viewed as one of the smartest things organizations can do to broaden their reach and increase their operational efficiency. Combining with another organization whose mission is closely aligned can help reduce the financial burdens common to nonprofits — enhancing the impact of funding by combining resources.
Yet, merging nonprofits can only succeed when the two organizations are a good match for one another. And even if that’s the case, a clear set of steps needs to be followed to ensure that the merger process is executed smoothly, without negatively impacting the mission of either organization.
Where to start with merging nonprofits
If your organization is open to the possibility of merging with another organization, it’s helpful to start the process by answering a few questions:
- What is the aspiration that you and a partner organization can achieve together? Start a conversation about what you envision for the future of your organizations and how combining can move you closer to that goal. It isn’t necessary to have lofty ambitions — maybe you simply want to continue as you are today and deal with a looming challenge or succession issue that is hard to tackle alone.
- Do you know your numbers? Before making overtures to a fellow nonprofit about a possible merger, you should make sure you can describe your own organization’s situation in terms that can be compared and digested by a partner. How do you impact your mission and stakeholders? How do you define revenue and from what activities does it arise? What do you spend money on in pursuit of your mission? How much and why? A potential partner will be much more interested in discussing a merger if they know you have your arms around the specific, quantifiable ways that combining the two organizations will affect the surviving group’s effectiveness. Look closely at your income and expenses and consider where judicious changes might be made to improve both organizations’ financial health.
- Will a merger make the combined organizations stronger? There are a lot of potentially good reasons for merging nonprofits, but you need to make sure they apply to your organization specifically. Will a merger allow you to add new skills or aptitudes more effectively than if you made a few specific hires? Would combining two organizations into one help reduce overhead costs, such as for office space, human resources or accounting systems? Can you somehow complement the work you currently do and magnify your social impact?
- What does an ideal partner look like? In the big picture, you’re looking for an organization whose mission is similar to your own or is somehow complementary. But on a practical level, you need more than that. You also need to find a like-minded partner who shares your values — in other words, one whose management style and workplace culture mesh well with your own. Two organizations that are run completely differently may not merge naturally together, even if they look outwardly like a perfect match.
Engaging key stakeholders through the process
First and foremost, it’s important to get the support of board members, because as fiduciaries, they have a legal obligation to do what is in your nonprofit’s best interest. In addition, their strategic decision-making, input and ultimately agreement are essential for proceeding with a merger.
Convincing those key stakeholders of the benefits of merging nonprofits can be challenging, since there’s normally not an exchange of money during this type of merger. This means that one commonly used tool of persuasion — the price being offered by a potential partner — is sometimes not applicable. Instead, leaders must make their case for a merger not only by conceiving a fair financial transaction, but also by discussing the strengths of the partner and the probability that the deal will leave the two organizations better poised to pursue their missions than otherwise.
Nonprofits often depend on a devoted team of donors, volunteers and beneficiaries to achieve their missions. It’s crucial to start managing the perceptions of these important stakeholders early on to make sure they understand the wisdom of a merger and are invested in the deal’s success. Not only that, but there can be legal hurdles to overcome if merging nonprofits conflicts with the will of donors who may have set up legacy gifts to continue after their passing.
Finally, close communication with staff members is crucial to avoid hurting morale and productivity at a time when you need to be at your most united. Make sure that employees’ questions get answered, particularly regarding potential changes in leadership and how merging nonprofits will personally affect them.
Post-merger integration: Ensuring a smooth transition
Any negotiations with a potential partner need to tackle a few important questions early on to ensure that the eventual transition process goes as smoothly as possible. The most pressing is to agree upon a clearly defined leadership structure within the new organization. Many nonprofits have a highly driven, charismatic person at the helm who is partly responsible for the organization’s success. When merging nonprofits, one of those leaders often needs to step aside or work in a complementary role to the top executive.
This goes hand-in-hand with closely examining the two organizations’ respective workplace cultures and developing a plan so they can be successfully integrated without conflict. Staff members need to be closely involved in the transition process, since many of the day-to-day changes will fall on their shoulders.
Merging nonprofits can also create potential complications related to IRS designations for tax-exempt organizations. It will be necessary to engage consultants, legal advisors and financial experts to facilitate legal compliance and get any necessary approvals from governmental entities.
At Oaklyn Consulting, we’re deeply experienced in nonprofit transactions and have represented both buy-side and sell-side clients in the recent past. While we understand the aspects of nonprofit mergers that make them unique from their for-profit counterparts, we also have a keen eye for spotting where deals of any kind can go off track, and can offer knowledgeable advice on how to navigate those hurdles.
If you feel that merging nonprofits might provide your organization with the resources it needs to better fulfill its mission, we’d be happy to talk with you about how we can make that goal a reality.
