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Monday, April 4, 2011

Mergers & Acquisitions: A Strategy for Nonprofit Survival?


Nonprofit organizations (NPOs) are competing for a smaller number of government grants during the economic recession significantly impacting and restricting not only the industry’s ability to expand services but also to continue providing existing ones.

As a result, NPOs of all sizes are spending more time evaluating whether they are providing services as efficiently as possible given the dollars at their disposal. As NPO boards are being forced to think more strategically about efficiencies in pursuing their missions, merger and acquisition (“M&A”) strategy is becoming an additional means existing NPOs can grow, expand services and efficiently utilize the resources at their disposal.

Federal and state agencies that provide funding to NPOs also see M&A as an efficient model because it can reduce administrative overhead and channel more dollars to clients when services are consolidated.

As a result of the current economic environment, M&A is becoming more prevalent. The Bridgespan Group, a prominent nonprofit consulting organization that tracks the activity of NPOs, found in a 2009 poll of nonprofit executive directors that 20 percent of the 117 respondents envisioned that M&A could play a role in their response to the economic downturn.

M&A can strengthen effectiveness, spread best practices, expand the reach of services to clients, and do it all while making the best use of scarce resources, the Bridgespan Group study found. Strong organizations can use it as a tool to expand market share and increase provided services, while others can leverage this structure to serve more people.

Avoiding duplication of services is one of the key reasons to consider an M&A strategy.  Across the country, there are multiple NPOs providing similar services to small geographic areas.  For example, more than 30 non-profit organizations provide child social services in Santa Clara County.

If NPO leaders envision growth while continuing to provide efficient services, and M&A is seen as an option, a careful analysis of any potential partner should include an evaluation of:

Size: NPO senior executives and board members need to evaluate whether their size indicates minimal growth potential or if a larger NPO’s infrastructure may be too burdensome to realize expense efficiencies.  Larger organizations can use M&A as an effective tool to reach out to other geographic areas while leveraging resources. Smaller NPOs may realize that their allocation of expenses between program and general and administrative costs is too heavily weighted towards G&A and that an acquisition of their NPO by a larger one with more streamlined infrastructure may result in the delivery of services to a larger population.  Whatever the decision, all NPOs should  be paying attention to how larger, smaller and similar size NPOs are partnering around them.

Vision and Purpose of Mission: How a nonprofit is registered for tax purposes should also play a role in the determination of potential merger candidates, and any strategy should include consultations with legal counsel and the NPOs tax advisor.

Resources: In any M&A plan, costs and consolidation issues are very important. There will be legal costs to help merge, consolidate and update articles of incorporation, as well as fees associated with filing required documents.  Combined personnel resources including accounting and IT infrastructure are key considerations when evaluating the costs and benefits of potential merger. Professional advice will most likely be required help with systems integration and the financial accounting for the transaction.

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