The worldwide COVID-19 crisis has crippled many organizations. While federal relief funding has provided some support, for many nonprofits it simply hasn’t been enough. The sheer scale of the pandemic has placed some organizations in triage mode.
Business as usual is gone. This global crisis has served as a resounding wake-up call to many organizations. Even those that have never considered doing business differently are now exploring strategic pivots.
To avoid cuts in services to clients, reductions in staff, or even dissolution, many organizations are now considering mergers. A 2020 study published in the Stanford Social Innovation Review showed that nearly one-fourth (23.1 percent) are exploring some type of permanent partnership with another nonprofit.
What Is a Merger?
Quite simply, a merger is when two or more organizations become one entity. The assets, staff, and programs of the two organizations are joined together. The new alignment operates under the name of one of the existing merged organizations. In many cases, the board and executive leadership of the “surviving” group manage the new formation.
Mergers typically fall into one these models:
- Consolidations – Two or more separate organizations combine to form a new corporate body. The assets, staff, and programs of the two organizations are joined together, as are the liabilities and obligations of both organizations.
- Alliances – There’s no change to the formal structure of the organizations but rather a sharing of administrative and programming services to accomplish similar missions.
- Asset Acquisition – One organization dissolves by selling and transferring assets to another organization, which then assumes the liabilities for the transferred assets.
Many leaders choose mergers to improve efficiency, build capacity, or simply to survive. Some nonprofits find they can take the best of their programs, governance, and organizational cultures and create a new, more successful merged organization. In addition, mergers can strengthen an organization’s ability to deliver on its missions and increase the depth and scope of services it provides.
Another advantage of merging is increased community visibility. In some cases, relatively unknown groups that have limited ability to raise funds can merge with larger organizations, creating a new high-profile group that helps leverage large donors.
Communities can benefit from well-planned and executed mergers that result in stronger and expanded services. Resources can be used more effectively and efficiently, services can continue, and nonprofits can become more sustainable.
Those who have studied and participated in mergers warn that cost savings shouldn’t be the sole reason to merge. While mergers can result in efficiencies and new management practices, money shouldn’t be the principal motivation. For that reason, the merger of two financially unstable organizations is unlikely to succeed.
Five Key Considerations
1. Understanding the Importance of Communication
One of the goals in the merger process is to create a situation where nothing is hidden and there are no surprises. In other words, organizations must be transparent and make no assumptions. Clarify expectations. The more specific you are in the planning stages, the fewer surprises there will be deeper into the process.
Internally, talk of mergers can create anxiety among employees who fear loss of job, change in leadership, and other conditions beyond their control. To curb this (and to avoid rumors), it’s important to communicate frequently with employees in every stage of the process—including after the merger has taken place.
Externally, it’s important to communicate with stakeholders and the general public regarding the changes, helping them understand the logic and benefits.
2. Understanding the Importance of Organizational Culture
John Bonnell of J.D. Power and Associates says mergers fail for a variety of reasons. One of the biggest, he says, is “the same reason that marriages do—a clash of personalities and priorities.”
The “clash” often has to do with leadership styles. How will staff be managed? Who will lead? How will employees respond to new leadership and new or additional responsibilities? “Priorities” relate to the organization’s mission and vision. When these don’t align, there’s little chance the merger will succeed.
3. Understanding the Timeline
Most mergers take anywhere from six to 18 months to complete. A written plan will help guide the organizations through each step of the process. When there are long, unexpected delays, parties can become disillusioned, costs can increase, and situations can become less favorable.
4. Understanding the Real Costs
While the pandemic has forced many organizations to explore survival strategies, a merger shouldn’t be viewed as a short-term solution. In fact, mergers almost always cost more than anticipated. In the long-term, mergers may save money—having one CEO rather than two, a single insurance plan, etc. But there can be added expenses upfront. Costs may include significant facility changes, PR material redesigns, legal fees, technology, and other realignment activities.
5. Understanding Due Diligence
Mergers are complex business transactions. To help board members and leaders make an informed decision, there must be sufficient inquiry.
It will be necessary to examine IRS records, contracts, licenses, claims or litigation, audits, budget sheets, annual reports, governing structures, organizational policies/procedures, agreements and affiliations, real estate, marketing materials, program services, current and potential liabilities, etc.
It’s deep within these documents that an organization’s true health can be discovered.
A study conducted by the Bridgespan Group identified three market characteristics that are favorable to successful nonprofit merger activity:
- There’s a large number of nonprofits in the market, with many small players
- There’s a high degree of competitive pressure, with performance factors that are measurable, and impersonal funding sources
- There are barriers to organic growth, including asset-intensive missions, saturated markets, and highly regulated environments
While some industry leaders believe that a merger is one of the most powerful change agents available to nonprofit organizations, others see mergers and acquisitions as fundamental threats to the core of the population or niche service providers. The truth probably lies somewhere in between these two views.
Should you find yourself wondering whether your organization might be more effective and stable by merging, make sure you and your board approach the process with the utmost caution, understanding both the potential hazards and benefits that may lie ahead.
While much of the future is uncertain, it’s clear the next few months and years are likely to bring about significant changes in the nonprofit sector. As boards and senior leaders work to adjust to these changes and further their missions, some may find merit in combining resources and forming mergers and alliances. Yet, after careful consideration, others may decide that remaining independent is the most viable option for their organization.
For more information, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.