2020 has been a difficult year for nonprofit organizations. Challenges include declining revenues from donor contributions and government funding, as well as increased demand for services due to the economic impacts of the pandemic. This year, more than most, for nonprofit organizations to survive in today’s economy, cutting expenses and strategic collaborations will help ensure the success of organizations. Like all businesses, including nonprofits, we have seen a trend of mergers and acquisitions (M&A) occurring over recent years. Without shareholders, there may not be a financial incentive that drives the M&A of struggling nonprofits; however, the idea of finding financial relief by sharing resources, improving operational effectiveness, and increasing mission impact is creating interest in M&A for nonprofit organizations.
M&A involves the process of combining two organizations into one. The goal of M&A is to achieve synergy where the outcomes from the formation of a new organization is greater than the outcome of two entities operating independently.
The following are benefit considerations of M&A:
- Reduction of expenses: Reducing costs are often seen through elimination of staffing redundancies, overhead expenses, and capital expenditures.
- Increased market share: Assuming two nonprofit organizations have the same or similar mission, bringing their resources together would likely result in serving a larger market share. There is also the added benefit of eliminating the competition for the same resources (primarily donor contributions) between the two organizations.
- Increased outreach capabilities: Expansion of the size of the organization often leads to the nonprofit organization’s ability to expand its geographical service area and provide aid to a larger number of individuals.
Creating a due diligence process that overcomes the difficulties associated with M&A will increase the likelihood the M&A will succeed. The following are key considerations when evaluating M&A:
- Board alignment: Are the overall missions of both organizations the same? Ideally, this would be the case when entering into a partnership. This will ensure that one organization is not significantly changed post-merger. Getting the boards aligned in both organizations can help ensure the missions of both organizations stay on track.
- Culture: Are the cultures similar enough between both organizations to ensure a smooth transition? Often organizations bring in an external consultant to provide an unbiased third-party perspective on the merger of the two organizations.
- Tax-exempt status: Has consideration been given to ensure the tax-exempt status? The Internal Revenue Service (IRS) requires tax-exempt organizations inform the IRS of an end of operations, which includes merging with another tax-exempt organization. Consideration should be given regarding the potential tax consequences of the M&A to ensure exempt status is not lost under the formation of the new entity.
- Stakeholders: How will the stakeholders of the organization respond to changes from the M&A? This might be the biggest consideration when evaluating an M&A. There are many stakeholders in nonprofits, including the founders of the organization, employees, donors, committee members, and the recipients of the nonprofit’s services. Creating a strategic plan and timeline for how and when to communicate the M&A to the stakeholders will help ensure everyone is included in the transition process.
Nonprofits will continue to provide a necessary service to members of our communities. The success of nonprofit organizations is often defined by the dedication, passion, and motivation of its employees and board members; however, the organization must not lose sight of the need to build a stable structure in order to meet the mission of the organization. M&A is a strategy that can quickly ensure the growth and continued operations of the organization.
If you have any questions regarding this information, or any other issue affecting your Not-for-Profit organization, please contact your Blue & Co. advisor.