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When Nonprofits Merge: A Financial Professionals Guide

When Nonprofits Merge: A Financial Professionals Guide

1.52 million charitable organizations, and an increased competition between them for the eyes and hearts of donors, grant writers, and corporate benefactors. In this, two words come to mind: crowded and competitive.

In the for-profit world, these two words lead to one common result: consolidation.

In the nonprofit world, it sometimes means the same, according to the BDO Nonprofit blog:

“Consider that the number of tax-exempt, mission-driven organizations jumped by nearly 12 percent from 2003 to 2013, according to the National Center for Charitable Statistics. In other words, over the span of 10 years, a sector chronically challenged by funding shortfalls experienced a period of sustained growth—but without a complementary rise in financial support, and with the added pressures of recessionary austerity. Government grants have declined, private donations have increased only marginally and more nonprofits of all shapes and sizes are left competing for limited funds, all while working to meet a growing demand for their services. Crowded out, many now lack the resources and scale they need to achieve their mission and deliver the impact they are striving for.”

Why Merge?

According to a study of merging nonprofits completed by Nonprofit Quarterly, there are a wide variety of reasons that two nonprofits merge:

  • 93 percent of participating organizations said they pursued merger to increase service delivery.
  • 93 percent reported that they wished to secure through merger the long-term financial viability of one of the merging partners.
  • 75 percent said their reasons included the salvaging of services that might otherwise be lost.
  • 56 percent sought to expand services to new markets and 29 percent sought to expand the types of services they could offer to consumers.

What comes as a surprise, however, is that most nonprofits do not merge due to financial crisis.

Benefits of Merging

The study further read into the three years following a merger finding six key outcomes:

  • Improved image, reputation, or public support;
  • Improved, expanded, or preserved services;
  • Increased quality of operations;
  • Increased efficiency of operations;
  • Improved financial stability; and
  • Development of a positive organizational culture.

Merger Challenges

Without proper planning, there are many hiccups and pitfalls that can occur. In the BDO Article, the consultant highlighted four mistakes in planning or executing a merger of nonprofits, highlighted below:

  • Poor Timing: Many organizational leaders consider mergers as a last ditch effort in the face of duress. By waiting too long, organizations with the intent to merge will put additional pressure on the staff in aligning cultures and talent. BDO recommends that “Instead of waiting until the eleventh hour, all partnership arrangements—and especially mergers—should be pursued before the storm clouds begin to gather.” According to MAP for Nonprofits, it’s best to have, at a minimum, six months to plan and complete a merger.
  • Faulty Due Diligence: Nonprofits looking to form a partnership or to merge need to properly vet and target organizations with which they look to partner. BDO recommends that nonprofits considering a merger ask themselves five questions regarding the strategy, financial statements, funding sources, governance, and mission compatibility. View the five questions here. Other considerations in due diligence can be found on the Nonprofit Law Blog.
  • Not Planning Far Enough into the Future: 53% of nonprofits report that they have three months or less cash on hand. Without planning for changes in structure, grant eligibility, and other changes, the two merging organizations may not “have enough money to save money.” Learn more about the legality issues and grant considerations for nonprofits from LegalZoom.
  • Collision of Cultures: Bringing together two different teams is a feat in itself, but doing so is pivotal. Taking the time to ensure that the two cultures can synthesize will bring long term benefits to the final organization. Communication before, during, and after the merger is important to ensure that employees are not fearing for their jobs.
  • Local ‘Brand’ is Cause for Consideration: A consideration under ‘not planning far enough into the future,’ a nonprofit’s ‘brand’ is more important than one may think. Donors, volunteers, and governments may have built a relationship with “nonprofit A,” but if “nonprofit B” takes over, local relationships may be strained.

For even more information on planning and executing a merger, view the nonprofit merger checklist from One-Justice.

Nonprofit Merger Resources

Knowing the increase of mergers throughout the recent recession, there are a plethora of resources for those organizations considering or in the process of merging:

We’re Here for Your Nonprofit Organization

Brittenford Systems has been providing financial software for nonprofits since our founding in the late 20th century. Whether you’re considering a merger, completely solvent, looking to grow, or just looking to gain additional visibility into your financial dealings, learn more how we can help.

For even more information, check out the following nonprofit resources:


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