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Too Many Nonprofits, Too little M&A

Nonprofit organizations are facing an increasing number of demands and it’s finding many of them stretched so thin that creativity and strategy are the only answers left to overcome these demands. Government funding is decreasing while costs continue to increase. Regulations are becoming more stringent. Individuals are less inclined to give because of the 2018 Tax Cuts and Jobs Act. All of these issues are added to the preexisting struggles to remain attractive for potential new donors, maintain good funding relationships with historical donors, and find efficiencies to limit administrative spending and have more direct service costs. Above all, nonprofit organizations’ goals at the end of the day are to fulfill their mission, provide their services successfully, be known for those services, and eliminate any open ends to ensure a complete and fulfilling mission overall.

Mergers and acquisitions (M&A) are out of the ordinary in the nonprofit world. Resources are very scarce since it is such a rarity and guidance on M&A in the nonprofit world is lacking. However, if used strategically, M&A can be beneficial to your organization and a great way to gain a competitive advantage in your nonprofit service areas. M&A should be as accepted in the nonprofit world as it is in the for-profit world. In addition to the challenges mentioned above, there are too many nonprofit organizations registered in the United States. Consolidation needs to happen. If M&A became a regular part of nonprofit business, it would be a win for everyone. In a saturated sector of nonprofits where there are not enough people who need the services of the organizations providing them, employees wouldn’t be as few and far between and competition would be decreased, which means more quality employees and donors for you. In the government-regulated sector of nonprofits where a lot of compliance and training is required, consolidation could decrease the time, effort, and cost of that training through shared knowledge and resources.

Why are M&A a better approach over alternative solutions? Growing an organization organically is no easy feat. Costs and time are generally not favorable and geographic expansion requires knowledge of the population and whether it is in need of your services. Requirements could include building an additional location, fostering new relationships with funders, learning skills and building knowledge to deliver those new services, as well as beating new competition. M&As are strategic if used effectively. Your organization would merge with an entity that already has the location, the donor relationships, the skills and knowledge, and reputation that is known over their competition.

The biggest take-away from this should be that M&A needs to be set up properly and rolled out smoothly and strategically within the consolidating organizations in order for it to be a successful transaction. As a board member, there are a few questions you should ask yourself, your peer board members, and key management personnel of the organization before a M&A occurs:

  • How will this M&A benefit the organization and the communities it serves? Each M&A is unique and occurs for its own specific reasons, but some of the benefits you may find include an expansion on geographic influence and serving a greater population, enhancement of or addition to services, advancement in reputation, and access to additional resources, just to name a few.
  • Does this M&A support or enhance the organization’s mission? Remember why the organization exists in the first place. Think about how the M&A would benefit or hinder the organization. What would ultimately happen to the organization if the M&A didn’t occur? Does the merging or acquiring entity have similar goals in its mission statement?
  • What challenges does the organization currently face that could hinder the M&A opportunity and how can those challenges be mitigated? Cost is an issue that faces many M&A candidates. Both organizations should be writing up a formal business plan that paints a picture for a fluid M&A throughout. This should be prepared in a way that is ready to present to potential donors who would be interested in providing funds to help with the process. Ensure the organization doesn’t miss a beat by reviewing any compliance requirements with laws and regulations.
  • What advantages and disadvantages would the organization face with this M&A? In addition to the expansion of geographic influence and the impact on a more widespread population, some may find the advantageous expertise and long-term financial stability to be attractive factors. Disadvantages the organization may want to consider include negative reactions from donors or staff, programs that become muddled and don’t differentiate themselves from one another, or a M&A candidate that has goals so far from your own that the organizations would not consolidate seamlessly.

Once the organization has had time to explore these thoughts, and if its leaders decide to move forward at this point, a more detailed analysis should ensue. Create a reasonable and realistic budget for the M&A. Capture every cost you can think of including travel, legal and accounting fees, additional compensation, etc. Don’t forget to leave room for unexpected costs. Specific details from both entities should be reviewed, including the latest set of financial statements, a list of donors, and organizational charts, among others. Once all vital information has been reviewed, consolidate it all into a summary that lays out how the M&A will impact both organizations. This helps paint a picture and will ultimately be a crutch in your decision- making regarding whether to move forward with the M&A. This also shows that you have done your due diligence and will leave minimal room for surprises.

If you decide to move forward from here, start designing the newly combined entity. Gather all contracts and historical business records from the original entities, determine if the transaction will be a merger, acquisition, or joint venture, and create a meaningful name. Who will be on the Board? How will the assets and liabilities from the originating entities be integrated? Which overlapping costs could be eliminated from the combined entity? Build this new organization using each entity’s best features. Think about location, operational details, and review administrative procedures and agreements. Brainstorm new long-term and short-term goals, as well as your plans to reach those goals. What needs to be done to ensure this new organization fulfills its mission? Which funders are most likely to provide help? Make sure all employees understand their new roles. Granted, the initial transition might be a bumpy ride, but through practice and time, the M&A will be something of the past and your organization will be operating smoothly again.

In the nonprofit world, these opportunities usually come when someone in a key management position is retiring or an entity is in financial distress. This is a reactive approach to M&A and the opportunity may not come forth at the best time for you. If you treat M&A as a routine option for your nonprofit, you will take a more proactive approach and the opportunity will be there when you’re ready. Gain a competitive advantage in your nonprofit service area. At least consider making M&A a streamlined part of your organization’s business strategy.

Download the full guide for Nonprofit Board Members

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