Approaching nonprofit mergers with intentionality
A merger of nonprofit organizations can provide many benefits — but only when organizations enter the process with clear goals and conduct careful due diligence. Here’s what to consider.
Why pursue a merger
Your organization might consider a merger to strengthen or diversify revenue sources. This could be accomplished by combining with an organization that has, for example, stronger donor networks or more robust revenue-generating programs.
A merger might also help your organization reduce overhead and improve efficiency by streamlining operations. For example, sharing staff — and perhaps downsizing to a single facility (if not contrary to your mission) — can cut costs. Combining your purchasing power also may help you negotiate lower rates, discounts and better vendor service.
Another potential reason to merge is to expand your nonprofit’s impact. If your mission and the population you serve overlap with another organization’s, merging can grow your client base while reducing competition for limited funding.
Alternatively, you might seek to merge with an organization that can add services or programs for your existing clients. For instance, if your organization helps people experiencing homelessness find housing, you could join forces with a nonprofit that helps the same population find jobs.
Key considerations
Even if your organization has sound reasons to pursue a merger, several matters demand attention before you proceed, including:
Donor-related risks. When you merge, long-term donors may feel your mission is shifting in ways they don’t support or are less invested in. You might lose donors because you’re eliminating a specific program they’d like to see continue.
You must also be aware of any donor restrictions. If the organization you merge with has received restricted donations, the surviving organization generally must continue to honor those donor restrictions. Depending on the circumstances and applicable state law, donor consent or court approval may be necessary to modify certain restrictions. Failing to properly address restricted gifts can create legal and compliance challenges.
HR issues. A merger will likely lead to redundancies and staff cuts, which can hurt morale. You might also lose crucial institutional knowledge. You’ll need to handle workforce reductions with sensitivity, transparency and clear communication. Consider ways to keep cherished former leaders involved, perhaps as board or advisory committee members, when appropriate.
You’ll also want to ensure the organizations are compatible in terms of leadership styles, remote work policies and the desired level of employee input. Long-tenured employees may be especially resistant to change. Establish early on that the organizations are aligned on values, priorities and goals.
Merger-related expenses. Mergers between nonprofits are much less likely to involve the cash exchange that’s typical of for-profit transactions. However, nonprofit mergers can include expenses related to:
Professional services provided by attorneys, financial advisors and consultants,
Rebranding campaigns,
Office and facility relocations,
Lease buyouts,
Lost funding, and
Severance pay.
You might need to raise salaries to achieve pay parity in the combined organization. You may also need infrastructure upgrades, including new systems and IT equipment. These expenses will likely consume cash flow in the short term.
Finally, don’t forget about succession planning. Even if one or both merging organizations have a plan, a revised version will be necessary and may require negotiation. Given everything that needs attention before, during and immediately after a merger, you might be tempted to postpone succession planning. However, delaying it is a mistake. Identifying and developing successors takes time, and unexpected departures can disrupt your organization if you’re unprepared.
Proceed with care
A successful nonprofit merger creates a stronger organization that can deliver greater mission impact for years to come. Before moving forward with a merger, make sure you understand the financial, operational and governance implications of the decision. We can help you evaluate merger opportunities and assess your organization’s financial readiness. Contact us to start the conversation.
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