The future may look different for many nonprofit organizations

By:  Kathleen M. Clayton, CPA

2020 has been a difficult year for the world and certainly for the nonprofits of the world. Many have had to adapt and provide services in different ways. Many have seen a huge uptick in the need for their services. Many have lost most, or all, of their older volunteers. Many have been closed and are still closed. 

Funding has been erratic for many. Federal, state, and local relief funding has provided some support, but many smaller organizations really struggled through the application processes. The good news is many private donors stepped up and took the lead with increased individual and corporate giving. 

Given all the challenges, the nonprofit sector rose to the demands of 2020, but many have needed to rethink their “future” of their organization. In August of 2020, The Washington Post predicted that between the pandemic and the recession, as many as one third of nonprofits will close or merge before the economy recovers. Nonprofit leaders have considered many options this year just to survive. One of these options is to merge with another nonprofit.

Mergers can be a positive thing. What is the old saying, “Lead from a position of strength”? Rather than looking at a merger as a route out of financial distress or a leadership void, proactive leadership considers mergers an effective growth strategy in strategic planning. Many mergers serve to increase the depth and scope of services a nonprofit can offer. Mergers may improve efficiency and help build capacity. Mergers can increase geographic coverage, bringing services to a wider audience. Mergers may increase revenue or reduce overhead type expenses. But there are pitfalls too. 

Some challenges to be considered when discussing a potential merger:

  • Is there mission alignment between the two organizations?
  • Can mutual merger gains be identified?
  • Does either organization face a founder transition?
  • What are the financial and legal challenges?
  • Will there be considerable technology and policy changes?
  • Are there resources, funding and volunteer time, that can be dedicated to the merger?
  • Has each party done its own SWOT (Strength, Weakness, Opportunity, Threat) analysis?
  • Since mergers can take many months or even years, has an appropriate timeline been considered? And finally,
  • Is the fit right, more formally will cultural integration be possible?

Maybe the organization is not quite ready for a merger. The most successful mergers have strong working relationships before merging. A shared service agreement between the parties might be a good step to test the waters. Often seen are agreements to share accounting, finance, development and marketing staff. These arrangements allow executives and staff from each organization to work together, to benefit both but also to help answer the “fit” questions. Beyond the limited scope of the shared service agreement, there is typically no commitment to any further relationship. 

Another step might be to form a collaboration or partnership to share programs or delivery of services. This relationship allows each nonprofit to maximize their complementary strengths. Typically used for a specific program or purpose, collaborations and partnerships require “buy in” from separate and shared stakeholders. 

Another step may be a partially integrated merger. In this case, two organizations merge with each retaining their individual brands. Typically, this strategy is used between a larger organization and a smaller organization that have similar missions and services. Often, we see these smaller organizations marketed as “an affiliate of” some much larger entity. In this case it is vital that each organization’s stakeholders (board members, directors, donors, beneficiaries, and staff) continue to have a voice in their organization. 

And finally, a complete, fully integrated merger might be considered the next step. In this case either one organization acquires the second, which is then legally dissolved. or a new organization is established and the original organizations are merged into the new entity. There are many reasons:  legal, financial, and reputational, why one of these methods might make more sense.  Factors for successful mergers include:

  • All executives and board members must be merger champions.
  • Stakeholders on all levels should be involved in the process.
  • There should be opportunities for funders to participate in and give input into merger planning.
  • Due diligence will take time and may require outside experts such as attorneys and accountants.
  • Open, honest communication is a must.
  • Consider that an outside facilitator will being specialized skills to the merger and acquisition transaction discussion.

As nonprofits look toward the future, a strategic pivot such as merger should be considered. 

HBK CPAs and Consultants have participated in the merger discussions with many nonprofit clients. We’d be happy to consult if you are considering a strategic decision such as a merger.

About the Author

Kathleen has over 37 years of experience in providing auditing, accounting, tax and consulting services to privately held businesses and not-for-profit organizations. She specializes in preparing tax exempt status applications, consulting on charitable regulations and providing outsourced management and accounting services to numerous organizations. She routinely consults with organizations that receive federal and state funding. Kathleen holds a BBS in Accountancy and Management and an MBA in Business Administration. She is a member of the New Jersey Society of Certified Public Accountants (NJSCPA), the American Institute of Certified Public Accountants (AICPA), and the AICPA Not-for-Profit Section.

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