The Covid-19 pandemic is impacting nonprofits in one of two very different ways: some nonprofits are experiencing a dramatic increase in donor support and demand for services while the other half have watched their programs and funding come to a grinding halt because of issues related to social distancing. On each end of the spectrum, nonprofits are re-considering their plans for the future and what partners will be needed to realize them. Some organizations will consider mergers and, as they do, we hope this article will serve as a guide for their process.
Is a Merger Right for You?
David LaPiana, a nationally recognized nonprofit merger consultant and author of The Nonprofit Mergers Workbook, Part 1 & II, stresses that successful mergers will be driven by one or more of the following long-term strategic goals:
- Better market positioning;
- A larger market share;
- A higher public profile;
- Greater political influence;
- More strategic fundraising;
- A larger staff, allowing greater specialization of functions and the provision of more service;
- The creation of a continuum of services under unified control; and/or
- Better economies of scale.
If your nonprofit is considering a merger out of a desire to immediately start saving money, be forewarned: mergers are expensive. Mergers done well will require additional resources that will increase your current operating budget. Any overhead or payroll savings will most likely not be realized for a couple of years.
According to the Chicago Nonprofit Merger Research Project, a partnership between Northwestern University’s Kellogg School of Management, Mission + Strategy Consulting, and eight Chicago foundation funders, published in 2017, the most common denominators among successful nonprofit mergers include:
- A prior relationship or collaboration existed between the organizations that merged.
- Third-party consultants or facilitators were hired to navigate the often-lengthy merger process. (Median merger negotiation outcome took 15 months.)
- The board chair or a board member from one of the organizations emerged as the chief merger advocate. (Meaning that the merger process was championed at the board level and was not staff-led.)
- Motivations for the merger were spurred by a desire to enhance the competitive position of both organizations in response to external forces: competitors, shifts in government practices and policies, and the need for greater financial stability.
If you recognize your nonprofit’s merger intentions and capabilities among the benefits and critical requirements listed above, read on to understand how to proceed through the three primary phases of a nonprofit merger: Negotiation, Implementation, and Integration.
Once two nonprofits commit to exploring a potential partnership, the Negotiation Phase officially begins. Key steps of this phase include:
- Instating a “Negotiations Committee” or “Exploratory Committee” consisting of an equal number of board members from each of the potential merger partners. Nominations of non-board members who may have specific skills or experience beneficial to the discussion may be allowed as long as those nominations are unanimously supported. However, once the committee is inaugurated, no new members should be allowed to join.
- All Negotiations Committee members must sign an agreed upon Confidentiality Agreement. This exploratory phase will require both organizations to be fully transparent and divulge all aspects of their operations – including those aspects that may be embarrassing. If, ultimately, the merger is not pursued, all committee members must be held accountable for not divulging any information shared in negotiations with outside parties.
- Minutes must be carefully recorded at each Negotiation Committee meeting.
- Due diligence is conducted as
both organizations present and jointly review the following documents:
- Organizational – Articles of Incorporation, Bylaws, Organizational Charts, etc.
- Tax – IRS and State exemption letters, 990 filings, state tax filings, etc.
- Insurance – General Liability policy, Directors & Officers policy, Workers Compensation policy, etc.
- Personnel – all employee job descriptions and compensation, personnel policies, employment contracts, benefits programs, volunteer policies, etc.
- Financial – audited financial statements, current income and balance statements, current budgets, copies of loans or other debt financing arrangements, etc.
- Real Estate – deeds, leases, mortgages, etc.
- Legal – statements describing any current or threatened litigations, copies of licenses and permits, list of commitments that would cancel as a result of a merger, etc.
At the end of the Negotiation Phase, if a merger is still desired, the Negotiations Committee will document a merger proposal to present to the respective boards of each of the merging organizations. The merger proposal will summarize the outcomes of the exploratory conversations and identify which specific merger structure will be pursued. (Parent-subsidiary, one organization acquiring/absorbing the other, or dissolution of both organizations and the incorporation of a third new entity are just a few of the potential options for consideration.) Each organization’s board must approve the merger proposal presented per their respective bylaws in order to move into the Implementation Phase.
The Implementation Phase is often the shortest of the merger phases, depending on how the new merger will be structured; which is a good thing as it is critical to hire an attorney experienced in nonprofit mergers to guide this phase. Essentially, the only goal of this phase is to legally merge and incorporate the two nonprofits to become one entity. Unlike mergers conducted in the for-profit world where attorneys are hired to represent each organization in this process, nonprofit mergers should involve only one lawyer who serves as a mediator to create mutual success for the merging organizations.
Usually, as organizations reach this phase, there is a sense that the majority of the work has been done. But, that’s not true. In fact, the Integration phase is the hardest and longest phase of the merger process. There are always unanticipated “hiccups” that arise as new boards, staffing structures, donor systems, financial records and organizational cultures are blended together. This phase requires significant behavioral change throughout both organizations and can be quite emotionally challenging. Make sure all members of your leadership team understand the full scope of the merger process and are fully committed to the work and patience required to successfully complete the Integration Phase. Integration is not easy, but it is the most rewarding of all the merger phases, as the organization’s new identity – and each person’s role within it – is defined resulting in a shared sense of empowerment and long-awaited forward progress.
Collaboration is the heart of nonprofit work and mergers are the ultimate manifestation of collaboration. Many of our most valued local nonprofits grew out of two smaller programs or organizations uniting and leveraging their combined resources to create a greater good. We understand that the process is complex and want to remind you that Spokes is here to help. If you need a sample Confidentiality Agreement, sample merger worksheets, consultant referrals or an introduction to nonprofit leaders who have led successful mergers, contact us! In the meantime, here are a few other resources that may be helpful for you as you consider if a merger is right for your nonprofit.
From Stanford Social Innovation Review, “Nonprofit Mergers that Work”.
From the Council of Nonprofits, “Mergers, Collaborations and Strategic Alliances”.
From Nonprofit Quarterly, “Nonprofit Mergers: New Study Sees Strategy and Success”.