How to Navigate a Merger or Acquisition in the Not-for-Profit Sector
Mergers and acquisitions aren't part of a typical not-for-profit organization's growth strategy, but they may be a resource worth considering. As with the for-profit sector, a strategic merger or acquisition can enhance service offerings and strengthen marketplace position. It may also extend the reach of an organization's mission and enable the organization to serve a broader audience.
Not every not-for-profit organization has the luxury of considering whether to go through a merger or acquisition. Talent vacuums or unexpected executive vacancies can present significant operational challenges to smaller organizations. Declining enrollment and state and federal support has left its mark on some educational institutions, particularly smaller universities and community colleges. Combining with a large organization or institution may be the only option on the table if an organization wants to keep its doors open.
For other organizations, looking for growth through acquisition may be a good fit. Charities and other organizations that provide support to the community may find that they are one of several groups that provide similar services to their community. The Arizona Children's Association acquired seven other types of organizations, and with each acquisition, increased the number of beneficiaries by nearly 100 percent. Larger organizations also tend to be better prepared to manage federal funds and large grants, in part because they are more likely to be able to demonstrate a significant impact on the community they serve. Foundations may also be looking for grant recipients of a certain size; many are more likely to fund a $20 million organization versus a $1 million organization.
There are some nuances, however, with not-for-profit mergers and acquisitions that make them unique from the types of deals that take place in the for-profit sector. Being mindful of the issues that may emerge can help ensure that your organization's complex transaction is successful.
The Transaction Process
Before undertaking a merger or acquisition, not-for-profit organizations will want to meet with their Boards of Directors and present their plan. Boards of Directors will likely be the ones who approve a due diligence project, which can be costly but necessary to undertake once an acquisition opportunity has been identified.
Due diligence allows the buying organization to take a deep look at an acquisition's key value drivers and risks. Not-for-profit organizations will want to ensure the organization is sound, but they'll also want to look at compliance risks. Do revenue streams come from unrelated business income? Does the organization spend significant amounts on lobbying? Does the organization's gift acceptance policy mirror our own? In recent years, two United Way organizations that merged discovered that one organization had accepted material charitable gift annuities with very unfavorable terms (i.e. 10 percent payouts for relatively young annuitants).
Donor support is also important to consider. If the acquisition has a similar mission, are there any overlapping donors? If an organization and its acquisition both receive support from the same foundation, for example, the foundation would likely adjust its support once the transaction goes through. Significant private donors may also need to be consulted to determine whether they will continue their support of the organization post-acquisition.
If an organization is identified and approved for acquisition, then both the not-for-profit acquiring the organization and the organization being acquired will want to thoroughly map out how to communicate the deal with their stakeholders. Blending brands can be especially difficult in the not-for-profit sector, and combining two boards of directors can also make for a challenging process. Ample time should be left to navigate these discussions and ensure key stakeholders understand the plan.
The type of organization undergoing the merger or acquisition may also trigger unique considerations.
501(c)(6) trade organizations have been struggling for several years with declining membership. Merging with another related association may have the benefit of expanding a member base and reducing overhead costs. As part of the pre-transaction due diligence, associations should review their bylaws. Some organizations may require members to vote on whether to go through with a transaction, which will require ballots and increase the number of stakeholders involved in the merger and acquisition discussion.
With charitable organizations, communication with key donors will be crucial. If endowments or other gifts cover a significant portion of operating costs, organizations will want to verify that support will continue after the transaction takes place.
Higher education institutions have very strong brands and a significant number of stakeholders who have chosen to attend the institution based, in part, on that institution's reputation. Merging campuses and student bodies is so no easy feat, and many higher education facilities like the Connecticut State Colleges and Universities System are considering alternative strategies. Partnerships and affiliations with other educational or cultural institutions can help make the most of limited resources. Sharing administrative functions, such as financial aid, information technology and human resources may reduce expenses without the hassle of a full-blown merger.
Evaluate the Market
There are plenty of success stories out there involving mergers and acquisitions of not-for-profit groups. Not-for-profit organizations looking to grow may want to do some research into how organizations with similar missions have navigated the merger and acquisition issue. GrantSpace's Collaboration Hub provides a searchable database of back-office consolidation, joint programming, mergers and other alliances in the not-for-profit space. A transaction advisory specialist can also help an organization evaluate opportunities in the marketplace.
For More Information
If you have specific comments, questions or concerns about whether a merger would be a good fit for your organization, please contact us. Published on September 25, 2017