- Executive Toolbox
- Career Center
- About Us
From all indications, nonprofit organizations continue to explore mergers with other nonprofits at a strong pace. But there were reports in 2012 of several attempted nonprofit mergers that, having been investigated to varying degrees, ultimately failed to result in combinations of the organizations. Why? Perhaps, as in the famous first line of Tolstoy’s Anna Karenina about unhappy families, all of these nonprofit mergers failed for different reasons. But it may be that the “failure rate” can be reduced, or at least the commitment of resources to pursue unlikely mergers could be lessened, if the chances of success were realistically assessed early in merger discussions. To that end, here are some questions for the leadership of each organization to ask as merger discussions get under way.
1. Do the advantages of merging overwhelm the advantages of continuing separately? A few nonprofit mergers are clearly propelled by the existing or prospective decline of one organization or the field it serves; that organization is seeking a “white knight” or “any port in a storm.” But those situations are rare. More often there are just one-too-many organizations serving similar constituencies and incurring inefficiencies through unnecessary competition. If it seems obvious to leaders on both sides at the beginning of nonprofit merger discussions that the two will clearly be “better together,” the chances for eventual success are high.
2. Is there a singular triggering point or special circumstance that makes a merger particularly opportune at this time? Many merger discussions between the leaderships of nonprofits are prompted by unique factors. One organization’s longtime CEO is retiring. Formidable competition to the trade show is appearing on the horizon. Headquarters leases are expiring. The legislature is cooking up an unpalatable meal for the industry, profession or field. It is common for two nonprofits to parlay these kinds of factors into widespread support for a combination.
3. Does support for a merger emanate from only discreet segments of the membership or leadership? An organization with members that have voting rights – on electing leaders, on bylaws changes, on dues increases, or on almost anything – will most likely need the approval of its membership before a merger can be closed. Indeed sometimes the law requires a super- majority to approve a merger. So unless there is a realistic prospect of widespread support for the merger, its chances of getting beyond the discussion stage are modest.
4. Does one prospective merger partner have unrealistic expectations about its “fair share”? When two nonprofits considering a merger are of relatively unequal stature – in revenues, memberships, donors or surplus – the merger still tends to be presented publicly as a “merger of equals” in order to not offend the constituency of the lesser one. Nevertheless the stronger organization might be entitled to realize more from the transaction – in board seats, in perpetuation of programs, or in retention of staff. Unrealistic expectations by either side in this regard is not a favorable omen.
5. Are there substantial, and perhaps unquantifiable, risks facing one organization? The financial and legal due diligence processes are intended to acquaint each board with any risks facing the other organization so that the board can make a sober assessment. Risks will often not doom a nonprofit merger if the means are at hand to manage them, such as surplus assets, insurance or contract rights. But major risks that defy measurement or assessment – such as glacial shifts in the field represented by one or both organizations – could make it uncomfortable to pursue.
6. Is either organization exceedingly enamored of its “status quo”? Like the old saw about the “girl who fell in love with the smile but married the whole guy,” some organizations are considered “almost perfect” by their constituents because of one great feature. When the organization has a “killer app” – a program or activity that is universally considered important or even essential by its users -- sometimes those users have trouble seeing the possibility of things getting even better through a merger, particularly for the long-term future. They don’t want anybody to “move their cheese.”
7. How quickly and easily can decisions be made? Some nonprofit mergers lose their momentum because the decision-making process is too lengthy or too complex. An overly democratic or excessively inclusive approach to determining the viability of a merger can be a negative, as can the need for too many levels of approvals. Best would be a small group from each merger partner that develops enough confidence in the merger and its advantages that the group together makes a unanimous and unequivocal recommendation to both organizations.
8. Where is opposition likely to emerge and can the opposition be turned around or neutralized? It is axiomatic in nonprofit organization governance that a committed vocal minority can defeat almost any initiative. It is essential to anticipate where opposition to a merger might arise and take steps to “turn” the opponents, if not into supporters at least into neutrals. Often that will mean making compromises that otherwise would not be necessary. Nonprofits tend to make decisions by consensus rather than by close votes. So the prospects for consensus-building should be assessed early in the discussions.
9. Are there obvious deal-breakers on either side? Nonprofit mergers usually don’t turn on money issues; so other, less-intuitive factors can get in the way of success. What will be the name? Whose CEO or staff will survive? Where will the headquarters be located? How will public policy impasses be resolved? These kinds of issues should be surfaced early, not late, in the discussions and a realistic effort undertaken to ascertain whether there are trade-offs or other paths to resolution available.
10. What is all of this going to cost? A nonprofit merger is a major transaction, even when undertaken between smaller organizations and even if everything sails through to approvals and closing. To avoid unpleasant surprises, both sides should make realistic assessments of the costs likely to be incurred. Legal and financial expenses will be significant because careful due diligence reviews by lawyers and accountants are essential, as well as agreements and government filings. There will be many meetings, significant staff time, and – often overlooked – post-closing tasks such as combining benefits and HR policies, assigning trademark/copyright or contract rights, and preparation of stub-year audits and 990s.
Bottom line: It’s best to ask these kinds of questions at the beginning of nonprofit organization merger discussions; deferring them can lead to unpleasant surprises or even jeopardize the whole deal.
Jacobs is a partner at the Pillsbury law firm in Washington. He is general counsel to ASAE and author of The Legal Guide to Nonprofit Mergers and Joint Ventures. Contact him at firstname.lastname@example.org.