Everything changed five years ago – so much so, many futurists, including myself, shifted from long-range planning to week-to-week scenario planning. With government support like PPP loans, many nonprofits were able to stay afloat. Needless to say, the past few years were the ultimate stress test for the social sector.
Now, however, a new chapter lies ahead. Nonprofits have the opportunity to reinvent our missions, recalibrate our work culture and reinforce our systems. But more changes loom – inflation, reduced government support, donor fatigue and the possibility of a recession. These challenges open the door for deeper conversations around nonprofit consolidation – through mergers, acquisitions or exits.
In recent years, I have been honored to to present on this topic with attorney friends and colleagues at the annual State Bar of Texas Conference on Governance of Nonprofit Organizations. You can view our collective presentation slides here. Below we cover some key questions we’re often asked about mergers, acquisitions and exits:
Is nonprofit consolidation on the horizon? What should nonprofits consider?
During strategy planning, every nonprofit should ask a fundamental question: Should our organization continue to exist? While bold, this question helps clarify purpose and create alignment among board and staff. Community surveys and internal strategic discussions can help break it down:
- What the community needs – Why does this issue exist and persist?
- What the organization wants to accomplish – What is its vision for the future, its mission and its unique value to the community?
- What strategic challenges the organization and industry are facing – What barriers could hold the organization back from delivering on the mission?
As leaders consider their options, it is critical to understand the ecosystem and the organization’s role within it. Some of these conditions are within the organization’s control, and others are not. This baseline understanding is the first step before evaluating whether a merger, acquisition or exit should be pursued while all options are on the table during strategic planning efforts.
How do merger discussions start in the social sector? What makes them more or less successful? What is the difference between a merger, acquisition or exit in the nonprofit sector?
Nonprofit mergers and acquisitions (M&A) share many similarities with the for-profit world – but with one notable difference: nonprofits already collaborate frequently to solve problems through coalitions, shared services and partnerships. As a result, M&A work can be a natural evolution of previous work together.
For example, two nonprofits may choose to merge to strengthen their collective footprint or provide more holistic services to a shared client population (e.g., forward or backward integration). Based on research, the most successful M&A discussions emerge from existing collaborative work where nonprofits view each other as trusted partners. In contrast, the least successful M&A discussions are forced, either by funder pressure or a crisis situation in which one organization needs the merger to survive.
A good starting point for M&A discussions would be to ask: Would we be stronger together? From there, nonprofits can explore different consolidation paths, including:
- Outright Merger (also known as Consolidation) – An outright merger is when two or more organizations bring strength to the partnership and join forces to form a single hybrid organization. This often includes a detailed process to combine the greatest strengths of each organization to create a stronger, unified organization.
- Parent-Subsidiary Merger (also known as an Acquisition) – An acquisition occurs when a more dominant organization (in territory and/or financial size) acquires a smaller nonprofit as a subsidiary to gain expertise and/or territory. Often, the dominant nonprofit drives this process and mines the subsidiary to build an overall stronger and more dominant position in the marketplace.
- Asset Transfer (also known as an Exit) – An exit happens in one of two ways: 1) A nonprofit – often following a strategic review – determines that a program, service or event is either no longer needed or can no longer be strategically supported. If the program still holds value for the community, another social sector organization may take over its operations. 2) In some cases, an entire organization decides to wind down and cease operations. This exit can happen independently or in coordination with another nonprofit that agrees to continue valuable community work. In return, the receiving organization may receive assets, which could include physical property and/or financial assets such as government contracts.
What challenges can be expected during the M&A process? What are some of the benefits?
Like for-profits, nonprofits fill a void in the community, and their founders genuinely believe the mission is needed. However, the differences between nonprofit and for-profit business models change the dynamics of M&A. Improved financial performance drives for-profits to seek M&A, which is seen as a rational next step. Plus, an exit is often a desirable financial outcome for the founders or leaders. Nonprofits, on the other hand, have a double bottom line (financial health and mission impact). Founders or leaders are often reluctant to merge for three reasons: 1) they still believe the mission is needed; 2) their solution is a unique approach to serving a community need; and 3) they want to continue seeking financial support for that mission. Their decision is both rational and emotional, driven by the financials and the mission. Furthermore, because the loss of the organization (in whole or in part) is connected to the leader’s or founder’s legacy, the decision is often more emotional.
With this in mind, here are some common challenges:
For the Organization:
- Upfront time and cost for process, legal agreements & planning
- Overload from merging branding and processes into one future organization
- Uncertainty over contracts, donors and future financials
For the Community & Client:
- Need for community meetings and public relations to gather input and ensure proper communication
For Staff:
- Culture clash based on different values and norms
But, with all these challenges, there are also considerable benefits:
For the Organization:
- Better strategic positioning
- Improved influence
- Increased financial stability
- Improved efficiency
For the Community & Client:
- Streamlined client service delivery
For Staff:
- Greater career opportunities
To mitigate the challenges above, we recommend that nonprofits view the M&A process much like dating – with various stages of due diligence, trust-building and decision-making. By breaking up the process into these rational (and emotional) stages, it is often easier for nonprofit founders and leadership to make data-driven decisions based on the greater good.
If M&A is being considered, what is the best process to pursue?
Mergers, acquisitions and exits take time. During the process, new information is often uncovered, causing it to take longer than expected. Using our dating analogy above, it makes sense. Sometimes partners meet, fall in love and partner quickly. Others meet as friends first and eventually become partners. Some individuals partner for a while before moving onto a formal arrangement. Some partner and then choose to not partner any longer. The same is true in a nonprofit M&A where there are many factors to consider – beyond economy of scale.
However, we do have a recommended process (see graphic below) that can be customized based on timing, pre-existing relationship, and size and longevity of merging organizations.
What is the best time for legal counsel to engage in M&A conversations? Who else is needed?
Because M&A can be an emotional decision, sometimes it makes sense to engage an experienced nonprofit consultant (ideally an MBA with M&A experience) to kick off the first elements of each phase and bring an attorney into the process at key moments where legal agreements and expertise are needed (e.g., creation of Letter of Intent, filing with regulatory agencies). If the nonprofit has a board member who is an attorney, it might make sense for that individual to navigate the process until terms are established and an experienced M&A attorney is needed (e.g., Phase 3: Agreement).
Mergers and acquisitions take time and require careful planning, but if done correctly, they can bring a host of benefits to the organizations and communities involved. If you have been through a merger, acquisition or exit, we would love for you to share your thoughts with us. In the meantime, we hope you are enjoying the first few weeks of spring.
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