A recent Nonprofits Trends Report conducted by Salesforce shows that modern nonprofit organizations face many challenges — from difficulties with raising awareness of the nonprofit’s mission among the community to hurdles with controlling expenses and dealing with increased demand for the organization’s services.
Luckily, most of those challenges can be solved through mergers and acquisitions as a move for strategic growth.
This article helps board members, professional advisors, financial institutions, and other key nonprofit players to learn more about nonprofit mergers and acquisitions. Read on to explore what nonprofits achieve with an M&A deal, what factors nonprofit leaders should consider before entering the deal, and what to include in an M&A nonprofit checklist.
What is a nonprofit merger and acquisition?
Nonprofit mergers and acquisitions refer to the process through which two or more nonprofit organizations combine their operations, assets, and missions to achieve better efficiency, enhance their impact, or address certain financial challenges.
In nonprofit mergers, two nonprofit entities unite to form a new legal entity and operate under one legal name. Two nonprofit organizations combine their assets, liabilities, and programs. For instance, a merger occurs when two health-focused nonprofits merge to offer a comprehensive range of services under one entity, reducing administrative costs and enhancing patient care.
In nonprofit acquisitions, one nonprofit organization takes control of another. The acquiring organization absorbs the assets, liabilities, and programs of the acquired entity, which often ceases to exist as a separate organization, leaving its assets operating under the surviving entity. For instance, an acquisition takes place when a large educational nonprofit acquires a smaller one to expand its reach and incorporate specialized programs into its existing offerings.
Note: Sometimes when nonprofit leaders see an opportunity for collaboration, considering such options as joint ventures, partnerships, or simple contracts instead of a merger or acquisition might be enough.
The difference between the for-profit and nonprofit M&A
Let’s now take a look at how corporate M&A is different from M&A in the nonprofit sector. The main difference criteria are described in the table below.
| Criteria | For-profit entities | Nonprofit entities |
|---|---|---|
| Primary objective | Financial benefit and increased shareholder value | Enhancement of mission effectiveness and community impact |
| Key stakeholders | Shareholders and investors | Board members, donors, beneficiaries, and the community |
| Regulatory environment | Subject to securities regulations and antitrust laws | Subject to charitable organization regulations and Internal Revenue Service (IRS) requirements |
| Valuation approach | Based on financial metrics such as revenue, profit, EBITDA, and market share | Based on mission alignment, program effectiveness, and community impact |
| Funding | Through private equity, bank loans, stock options, and bonds | Through grants, donations, and philanthropic contributions |
| Impact on employees | Focus on cost synergies, which may lead to layoffs and restructuring | Focus on mission synergies, with an emphasis on retaining staff and volunteers for continuity |
Benefits of nonprofit mergers
Merging nonprofit organizations can achieve certain benefits through the deal, such as:
- Increased efficiency
Just like the combination of two for-profit organizations, nonprofit mergers enable nonprofit leaders to reduce redundancies and overhead costs by consolidating administrative functions and sharing office space. Additionally, combining resources such as staff, technology, and facilities can help to deliver services more efficiently.
- Improved financial position
Merging entities can benefit from a broader base of funding sources, reducing dependency on a single revenue stream. This way, a combined organization may gain financial stability, making it more attractive to donors and grantmakers.
- Enhanced services
A nonprofit merger of two organizations can extend the geographic reach and impact of services, allowing nonprofits to serve a larger or more diverse population. Additionally, by combining expertise and best practices, the acquiring entity and target organization can enhance the quality of programs and services offered.
- Mission expansion
In the nonprofit context, when two separate entities have complementary missions, their integration can be a strategic growth opportunity, which might help with a nonprofit’s mission expansion. This results in enhancing the overall impact and effectiveness of nonprofit work and helps make a bigger difference in their communities.
8 considerations for merging nonprofits
Now, let’s explore the main factors both organizations should consider in the nonprofit integration process.
1. Mission alignment
Before initiating the M&A process steps, both nonprofits should ensure they have similar missions and values to create a unified and effective new organization. A key objective behind the merger should be the strengthening of the shared mission rather than its dilution.
Thus, aligning missions helps avoid conflicts and confusion, ensuring that the merged entity can work towards common goals.
2. Complementary strengths
The next step is to identify how each organization’s unique strengths, such as expertise, resources, and networks, can be combined to enhance overall capabilities.
By leveraging complementary strengths, the merged entity can provide a broader range of services and improve its impact. This synergy can lead to innovation and more effective problem-solving.
3. Financial health
Though financial synergies aren’t the primary focus of mergers and acquisitions for nonprofits, it’s still important for both organizations to evaluate their financial stability and health to ensure the merged entity can sustain operations and fulfill its mission. This is to ensure that the potential merger won’t become a bailout but rather improve the financial health of the new entity.
4. Leadership and culture
For a new entity to stay efficient and enhance its mission’s delivery to the community, both organizations should thoroughly assess the compatibility of leadership styles, management practices, and organizational cultures.
Effective leadership is crucial for guiding the organization through the merger process and establishing a positive and cohesive work environment. Cultural alignment helps maintain staff morale and engagement during the transition.
5. Risk assessment
Identify and analyze potential risks associated with the merger, including financial, operational, legal, and reputational risks. A comprehensive risk assessment ensures that the merger process is as smooth and secure as possible.
Based on the risk assessment results, both nonprofits should develop mitigation strategies for identified risks to navigate potential challenges effectively.
6. Long-term strategy
An acquired organization and the acquirer should ensure that they align on a unified long-term strategy.
This involves setting clear goals, defining success metrics, and creating a roadmap for future growth. A shared vision for the future helps in maintaining focus and direction for the merged entity.
7. Stakeholder support
For a successful nonprofit consolidation, both organizations should also ensure the support of key stakeholders, including board members, staff, donors, beneficiaries, and other key nonprofit players.
Engaging stakeholders early and transparently helps build trust and gain buy-in. Their support is critical for the smooth execution and future success of the merger.
8. Due diligence
Just like in the for-profit M&A, the due diligence process remains one of the most critical parts of the nonprofit M&A integration.
Both organizations should conduct a thorough M&A due diligence to uncover any legal, financial, or operational issues that could affect the merger. This includes reviewing contracts, compliance with regulations, and organizational structures. Addressing these issues proactively ensures seamless integration and helps to avoid potential legal, financial, or tax consequences.
Legal and regulatory considerations for merging nonprofits
Reasonably, there are certain legal considerations and legal obligations that merging nonprofits should consider (and address) when entering the deal. Let’s briefly review the main ones.
Board approval
Nonprofits must secure approval from their board of directors before proceeding with an M&A transaction. This ensures that the decision aligns with the organization’s mission and the interests of its stakeholders.
- State laws
Nonprofits must comply with state-specific regulations governing mergers and acquisitions in the nonprofit sector. This may include filing certain documents, obtaining approval from the state attorney general, and adhering to specific procedures to ensure the transaction is legally sound.
- Asset transfer and restrictions
Nonprofits must carefully manage the transfer of charitable assets to ensure they comply with donor-imposed restrictions and state laws. This includes understanding any conditions attached to donated assets and ensuring they are used for their intended purposes post-merger.
- Tax-exempt status
The merging entities must maintain their tax-exempt status. This involves ensuring the combined entity continues to meet the requirements for tax exemption under federal and state law, including adhering to operational and organizational standards set by the IRS.
M&A checklist for nonprofits
Below, we provide an example of a nonprofit merger checklist for you to use for inspiration when drafting the one for your nonprofit mergers and acquisitions.
| Category | Tasks |
|---|---|
| Pre-merger planning |
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| Due diligence |
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| Stakeholder engagement |
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| Integration planning |
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| Legal considerations |
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| Post-merger activities |
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Key takeaways
Let’s summarize the main points from the article:
- M&A in the nonprofit sector refers to the process through which two or more nonprofit organizations combine their operations, assets, and missions to achieve better efficiency, enhance their impact, or address certain financial challenges.
- Top considerations nonprofit leaders should pay attention to before entering the deal include mission alignment, complementary strengths, financial health, leadership and culture, risk assessment, long-term strategy, stakeholder support, and due diligence.
- Additionally, nonprofits should consider legal aspects such as board approval, state laws, asset transfer and restrictions, and the status of a tax-exempt organization.
