Nonprofit Mergers Five Factors to Consider
Article

Nonprofit Mergers: Five Factors to Consider

by Tom Schulte
August 05, 2021

Until recently, mergers and acquisitions (M&A) in the nonprofit world were often viewed as somewhat distasteful or an indication that an organization failed to achieve its mission. The pandemic changed that prevailing perception.

Now, more nonprofits are considering strategic M&A activity as a way to recover from the COVID-related disruption to their revenues and operations. In a survey of nonprofit executives conducted by La Piana Consulting in the spring of 2020, 23% were considering mergers.

In truth, there have always been valid reasons for nonprofits to merge. Many like-minded organizations provide similar programs in the same communities. They may also draw their funding from the same financial sources.

In some cases, those financial sources are the ones initiating the merger talks. Foundations that historically funded two similar nonprofits might decide they want to consolidate their dollars with one recipient, urging organizations with similar missions to consider a partnership.

In other cases, merger talks are prompted by the impending exit of an executive director or another member of senior management. For many leaders who had been pondering the right time to retire or move to a different geography or line of work, the pandemic has provided an extra jolt of motivation. Hiring a new leader might be an option, but given the current talent shortage, finding the right fit can be a tall order.

Increasingly, nonprofits of all types and sizes are considering strategic M&A to expand their reach, strengthen services and use infrastructure and human resources more efficiently. But how do you increase the chances that the combination will achieve those goals?

Key Considerations for a Nonprofit Merger or Acquisition

If your board and executive leadership are considering a merger or acquisition, start by having discussions around the following factors.

  • Tax-exempt status. In any nonprofit merger or acquisition, maintaining the organization’s tax-exempt designation is table stakes. Due diligence should focus on making sure that the organization has a good reputation and that there are no areas of noncompliance or unasserted legal claims (see below). Note that the IRS requires notification — usually by filing a final Form 990, 990-EZ, or 990-N — when a tax-exempt organization ends their operations through a merger, transfer of assets or dissolution.
  • Shared mission, culture and commitment to best practices. The most successful nonprofit M&As involve organizations that share similar missions and cultures and approach the merger with a spirit of inclusivity. Both parties should remain open-minded, working together to merge the best practices of each entity. For example, perhaps you have a stellar donor management system that you want to see continued in the merged organization. Don’t be afraid to speak up about it, and be prepared to share ideas for how it might be implemented in the merged entity.
  • Mutually agreeable organizational name. When two similar-sized entities enter into a true merger (not an acquisition that the parties have agreed to call a “merger”), accounting standards require  the name to be changed. Choosing a new name is often a major point of contention: Should the merged organization use a hybrid of the two organizations’ names, or should they come up with a new name altogether? In most cases, the best solution is a completely new name that incorporates the mission and values of the two entities. Just remember that a new name calls for a significant investment in rebranding and donor communications. Without proper rollout of the new brand, you’re likely to lose existing donors who didn’t get the memo about the name change or who assume that the merged entity no longer aligns with their values.
  • Legal issues. Nonprofit mergers and acquisitions have unique twists, so be sure to engage a knowledgeable M&A attorney with experience in the nonprofit arena. Two of the potential legal landmines that can disrupt M&A plans are contractual requirements, such as a lease that gives the landlord the right to approve a merger, and unasserted legal claims.
  • Succession plan for management. The lack of a succession plan is an issue that beleaguers many nonprofits; don’t let it be a continuing issue for the new merged entity. Be sure to discuss plans to groom a successor for the merged entity’s executive leadership, especially if any of these executives is within the last five years of their expected tenure. Also consider how the nonprofit might benefit from moving the outgoing executive into a new role with the organization. For example, if the current executive director has strong fundraising skills, a position as director of planned giving could be a valuable addition to the executive team.

The decision to pursue a merger or acquisition should come down to what’s best for your nonprofit and its constituents. If combining forces through a merger or acquisition improves the chances of continued deliverance of your programs, then you have a responsibility to consider the option from all angles.

If your nonprofit needs help evaluating the benefits and risks of a potential merger or acquisition, reach out to a member of our nonprofit team for guidance.

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