Report Back: When Do Nonprofit Mergers Make Sense?

Federal Reserve Bank of New York

From time to time, I like to mix and mingle with my peers, and what better place to hobnob, rub elbows and generally get the gossip than at an industry workshop on nonprofit mergers and collaborations?  And so it was that I found myself this past October 4th attending a meeting hosted by the Federal Reserve Bank of New York and Enterprise Community Partners entitled:  “Smart Futures for the Non-Profit Housing Industry: When do Mergers, Collaborations, and Strategic Alliances Make Sense?”

The panel was moderated by Richard Roberts (Independent Consultant), and included John MacIntosh (Principal, SeaChange Capital Partners) and Michael Wadman (VP, Phipps Houses).  Given that the concept of nonprofit mergers is a rather hot topic these days (in more ways than one), I felt like I had some real takeaways from the panel – more than the usual belly full of coffee and danish, accompanied by the usual sliced fruits.

During down market cycles, nonprofits struggle just like many other businesses:  contracts are reduced, private funding sources shrink or dry up entirely, earned revenues (if there are any) tend to decline, and organizations experience layoffs, belt-tightening, and all the other many pleasures of hard times.  But nonprofits tend to resist consolidation, for a couple of reasons:

  • Nonprofits are driven by mission, and that mission is defined by executive management and the board.  Many nonprofits believe they are the best (and sometimes only) organization that can meet their stated mission in a given geography or with a given constituency.  Most nonprofits fear (and somewhat justifiably) that in a merger they will lose their sense of mission and therefore their unique identity.
  • Most nonprofits (certainly most community based nonprofits) have a sense of mission that extends to how they engage with their own staff.  When organizations are working to create economic stabilization and growth in their communities as part of their mission, mergers which create “redundant staffing” and therefore lead to reductions can feel contrary to that very mission.
  • Merging organizations means merging organizational leadership – both at the staff and board level.  This can be complicated for nonprofits, which tend to value participation and inclusion.  Whom do you decide to remove, or at least remove from primary leadership?  You can’t just make everybody a co-leader and split the baby.  You’ll wind up with hydra, or worse yet with a lot of in-fighting as territories are established.

I thought John MacIntosh did a really great job of laying out 8 key considerations for organizations looking into mergers and collaborations, as follows:

  1. Be proactive:  Many organizations begin to look at the possibility of a merger or consolidation far too late.  Board and executive leadership can linger over making the decision to seek collaboration partners and hollow out an organization from within.  In his experience, timelines of 18-24 months to establish and work through bringing partners together is not unusual.  This won’t be possible if one of the partners has just three months of liquidity left.  It’s also good to consider a “Plan B” in case negotiations between the two initial parties don’t succeed.
  2. Keep Mission Central:  Organizations must have a grounded sense of what they do, why they do it, how they measure success, and what they take for granted about the environment they act within.  In any successful collaboration, it’s important to develop congruity in at least 2-3 aspects of how mission is defined, met and measured.  It’s equally important, however, to remain flexible and understand that there will be give and take.  Attempting to achieve consensus at all costs is both unlikely and extremely labor intensive.  It may be necessary for leadership who identify strongly with key concepts or practices to relinquish those cherished aspects of the work, or if they cannot to consider stepping down.
  3. Watch Your Language:  Words matter.  The terms “merger” and “acquisition” can seem heavy-handed or dominating to certain parties involved in the transaction.  Terms like “union” and “collaboration” can make a difference in conveying the respect both parties hope to reflect in the process.  Whatever language is chosen, it’s best to define that language early, make it common knowledge to those involved in the process, and to stick to it throughout.
  4. Delay the Lawyers:  While consulting with legal counsel early in the process to outline key issues and sketch terms is very important, it’s equally important not to involve legal counsel too directly in negotiations until key terms of an agreement are already in place.  Too much wrangling can easily derail what can be a delicate process.
  5. Money Matters:  Very few mergers are justified by the idea of short term cost savings.  On the contrary, transaction costs such as legal fees, severance costs, lease breaking, IT and other operational restructuring, rebranding and so forth can run quite high.  For larger consolidations, $200-$300K is not unusual (although Michael Wadman pointed out the smaller organization he chairs will complete their consolidation with less than $30K in costs).  Consider potential costs early and manage them carefully throughout the process.  Good consolidations will allow for cost efficiencies to emerge over time (1-3 years).
  6. Seek Professional Support:  Transition consultants, experienced legal staff, and even foundation supporters who regularly fund mergers will be critical.  Such transactions are complex, and it’s important to work with people who handle them as a matter of routine.  Everyone will benefit from a more streamlined process, clearer expectations, and confident guidance.
  7. Don’t Dawdle:  Proceed as fast as you can, and as slow as you must.  Mergers and acquisitions are emotionally and physically draining for everyone.  Dawdling in and of itself can be enough to derail the process.
  8. Celebrate:  Many nonprofit leaders worry that in mergers leaders and staff can be lost, programs can be diminished, and missions can alter.  Bear in mind that without a well run consolidation, an entire organization may run the risk of disappearing completely.  Given the alternative, it’s important to acknowledge the diligence of all participants, and give thanks for what’s been preserved.

Thanks to Enterprise Community Partners and the Federal Reserve for organizing this presentation.