Nonprofits face many of the same challenges as their for-profit counterparts, including shrinking resources, cash flow problems and competitive threats. To survive many not-for-profits are following a cue from the corporate world and taking the plunge into mergers.
Take two environmental organizations that merged. Although they both focused on improving river water quality, their philosophies were different. But they were able to set aside their difference because they realized that merging could bring far more success – including increased public visibility and fundraising power – than either organization could have achieved on its own.
Merge for the Right Reasons
When should you consider combining resources with another nonprofit? A financial problem stemming from steady declines in grants and donations is a legitimate motivator. Duplication and overlap of services and mission may be another valid merger trigger. Brining organizations together can be a powerful way to build unity, accelerate mission achievement and use dollars more efficiently.
For instance, a smaller nonprofit with a solid program and good but modest record of achievement may seek a merger with a cash-rich larger organizations that needs to strengthen its programs in the area of the smaller nonprofit’s expertise.
You may also consider joining with another nonprofit to gain access to a larger skill set. Perhaps another organization has an outstanding dedicated staff, while you have excellent fundraising skills. Combining forces may enable you and the other not-for-profit to provide better services and maximize capabilities.
There may also be some good reasons to consider merging with a for-profit entity. Doing so can boost funding, raise the nonprofit’s profile and reduce administrative expenses. Keep in mind, however, that tax and legal complexities come into play. The main one is that an arrangement with a for-profit partner can’t involve the nonprofit improperly transferring assets to its for-profit partner. The IRS has stiff penalties for transactions that improperly reduce a nonprofit’s assets.
Look Before You Leap
If you’re mulling a merger, think about what you really want to achieve. The more specific your goals and anticipated outcomes, the easier it will be later on. So develop realistic goals stated in measurable terms, such as striving for a 30% increase in donations or being able to serve an additional 500 people each year.
Also, assess your readiness to be a partner. You’re a much better candidate for a merger if you:
- Know what you want to accomplish,
- Understand your strategic challenges,
- Have a strong board/management relationship,
- Are growth-oriented, and
- Have a history of successful risk-taking.
It’s also important for your organization to be steady. Those in crisis mode probably don’t have a good handle on their objectives, or even strengths and weaknesses.
Know What You May Lose
Before you jump into negotiations, realize that mergers do have risks, and problems can arise. Common downsides of mergers include:
- Time and costs. Few organizations realize just how much time is needed to successfully merge two entities. Depending on the size and complexity of the organizations, a merger can take up to two years to complete. Mergers can be expensive, particularly because outside experts, such as consultants, tax advisors and attorneys, are needed to assist with the process.
- Legal or regulatory hurdles. Many states have specific procedures that must be followed and forms that must be filed when nonprofits merge. And you may need to get consent from donors to legally transfer gifts or grants.
- Culture clashes: It may be difficult for individuals to set aside their difference and work in the spirit of cooperation. Fears, egos, politics and personal concerns are all likely to be visible as everyone struggles with making major organizational changes.
- Resistance: Potential partners must get buy-in from everyone, including funding sources, staff and other stakeholders. Disregarding concerns won’t make the process any smoother and may jeopardize the merger.
Find the Right Fit
Ultimately, a merger will be successful only if both organizations conclude that the benefits of collaboration outweigh any drawbacks. If you and your potential partner both are confident you can work effectively as a unified force and resolve any difference, you’ll be poised to enjoy a solid partnership.