Nonprofit Mergers & Acquisitions

Did you know that, as part of OFS’ Strategic Planning practice, we offer consulting on mergers and acquisitions? I ask for two reasons. First, the current economic environment is making the topic pressing. Second, we are getting a lot of requests for it, even though we haven’t broadly advertised it.

Why Should Nonprofits Consider Merging?

Even in the best of economic times, nonprofits should be looking at the benefits of consolidation.

Nonprofit organizations play a significant role in the U.S. economy. In 2022, there were 1.97 million nonprofits operating in the U.S., including 1.48 million 501(c)(3) tax-exempt organizations, according to the IRS. The vast majority of them are small.

The average annual budget for a nonprofit organization in the U.S. varies widely, but most operate with budgets under $1 million. A significant portion (97%) have budgets less than $5 million annually. Smaller nonprofits often struggle to meet their basic needs, while larger organizations can operate with significantly larger budgets.

With size comes security for your employees and scalability for your missions. Institutional donors have been advocating for consolidation for years. While no foundation will say there are too many nonprofits, they do say that there are too few well-run and economically viable nonprofits.

Now, with the current economic uncertainties being driven by Washington, they are saying it more loudly, with funding.

Benefits of Merging

Nonprofit mergers offer significant advantages, including increased efficiency through combined resources and operational streamlining, enhanced impact through broader reach and collaboration, and strengthened advocacy efforts. More importantly, they can also lead to innovation, greater access to funding, and improved donor confidence, ultimately contributing to the long-term sustainability of the merged entity.

Here’s a more detailed look at the benefits:

Financial and Operational Efficiency

• Cost Savings: Mergers can eliminate redundant administrative costs and leverage economies of scale, leading to greater financial resilience. 
• Streamlined Operations: Combining operations can simplify processes, reduce overhead, and improve resource allocation. 
• Increased Buying Power: A merged entity may have greater negotiating power with vendors, leading to lower costs for goods and services. 

Enhanced Impact and Reach

• Broader Program Scope: Merging organizations with complementary programs can expand the range of services offered, reaching a wider audience and addressing more complex needs. 
• Greater Visibility: A merged entity may have a larger profile and increased visibility in the community, attracting more donors and volunteers. 
• Stronger Advocacy: A unified voice can amplify advocacy efforts, increasing influence and impact on policy and community issues. 

Innovation and Collaboration

• Shared Expertise: Merging organizations can combine the expertise of their staff and boards, leading to innovative programs and service delivery models. 
• New Perspectives: Bringing together diverse organizations can spark new ideas and approaches to addressing challenges. 
• Combined Resources: Mergers can create a larger pool of resources, including funding, staff, and volunteers, enabling organizations to achieve more together. 

Donor Confidence and Sustainability

• Increased Donor Trust: A merged entity may appear more robust and trustworthy to potential donors, leading to increased funding and support. 
• Long-Term Viability: By combining resources and streamlining operations, mergers can ensure the long-term sustainability of the combined entity, especially in challenging economic times. 
• Resource Conservation: Mergers can conserve valuable resources, such as board members and grant funding, allowing organizations to maintain their programs and services.

When Should You Consider Merging

Nonprofit mergers should be considered when organizations can be better together, during executive transitions, or when facing a pending crisis. 

Reasons for Considering a Merger:

• Strategic Opportunity: Mergers can be a strategic move to expand programs, geographic reach, or expertise, creating a stronger combined entity. 
• Executive Transition: When an organization anticipates an executive leadership transition, a merger can provide a smooth transition and continuity of services. 
• Financial Stability and Sustainability: Merging can help organizations facing financial challenges or operational inefficiencies to become more sustainable by sharing resources and reducing overhead. 
• Crisis Management: When facing a significant crisis, such as a major fundraising failure or a loss of critical staff, a merger with a stronger organization can provide the support needed to navigate the crisis. 
• Mission Alignment and Complementary Strengths: Organizations with similar missions and complementary strengths can benefit from combining their resources to achieve broader impact and reach. 
• Community Needs and Demand: If organizations are serving the same community and facing overlapping needs, a merger can create a more efficient and effective service delivery system. 
• External Pressure from Funding Sources: Foundations or funders might encourage mergers to consolidate resources and achieve more impact with fewer recipients. 

Key Considerations Before Beginning Merger Discussions

• Mission Alignment: Ensure that the merging organizations have compatible missions and values. 
• Organizational Culture: Assess whether the organizational cultures are compatible and can be integrated effectively. 
• Leadership Compatibility: Evaluate whether the leadership teams can work together effectively and share a vision for the merged organization. 
• Legal and Regulatory Implications: Understand the legal and regulatory requirements for merging and how they will impact the merged organization. 
• Stakeholder Engagement: Involve stakeholders (staff, board members, donors, etc.) in the decision-making process and communicate the reasons for the merger clearly. 
• Financial Due Diligence: Conduct thorough due diligence on the financial health of the merging organizations. 
• Strategic Planning: Develop a clear strategy for how the merger will be implemented and what the goals of the merged organization will be. 

Don’t Try This Alone

This is a complex business transaction, and, executed quite differently in the nonprofit sector than in the for-profit sector. Just like running a capital campaign, it pays to get objective, outside expertise to help evaluate and conduct due diligence on a merger. If you are contemplating a merger, give us a call. We’re happy to discuss the process with you.