Nonprofit Mergers Are Like Falling In Love

Tips and resources for navigating the merger of two nonprofits.

A question was recently submitted to American Nonprofits about the organizational and legal issues of merging two nonprofits, by someone right in the middle of such a merger. We asked Ron Kratofil to share tips and resources for that situation.

The continuing pressure to do more with less and the growing challenge of maximizing our community impact have created a challenging environment for nonprofit organizations. So where do concepts like merger and acquisition fit into our evolving discussions? Having had the opportunity to be involved in both a full blown merger and an acquisition, I can relay to you the lessons I have learned.

First let me clarify the difference between a merger and an acquisition. Typically, in a merger two or more entities (who are relative equals) combine all assets and all liabilities into something new. An acquisition generally involves dissolving one entity (the smaller organization) and transferring selected assets to the acquiring (surviving) entity.

Mergers are a complex topic but at the end of the day are a lot like dating, relationships and marriage.

Step one is attraction. In a merger the attraction is ideally driven by a clear articulation of how the mission of the organizations and the vision for the community will be materially and positively impacted if the merger happens. I suggest this step be kept highly confidential so as not to create panic before any formal interest is expressed. Bottom line in a nonprofit, mission is everything!

Step two is interest. If the attraction holds over time, there will be a need to learn everything you can about the other party. During this time you will learn both formal and informal things about each other. Many of the formal disclosures will take place through a process known as due diligence. So at this phase you will likely need to get the lawyers, auditors and consultants involved. One of the trickiest pieces of knowledge to discern during this process is how the cultures of the organizations will mesh together in a permanent relationship. Much of the other information is fairly straightforward.

Step three is becoming a couple. If interest grows and all sides remain motivated there will likely be a series of board resolutions that involve the intent to merge. In addition, there will need to be a series of key stakeholder conversations. You will also need to review existing contracts your organization holds. Buried inside the fine print you will discover many of your business partners have a formal interest in the fundamental change of merger. Hidden in banking documents, funding agreements, lease agreements, etc., may be requirements to notify or even gain permission prior to a merger. Also include the IRS, state government, and key funding sources in your conversations.

The final steps involve engagement and marriage. During this phase look past the event (merger day) and remember this is about a long life together. Where is our home? What is our name? What will be our life’s passion (mission)? These questions all need to be worked out before the deal is finalized. Serious thought should also be given to how we govern this new entity including board size and voting director requirements. We may even need a prenuptial agreement of some sort to carve out certain pre-merger assets (such as donor restricted funds).

Once the information becomes public knowledge I would strongly suggest that you intentionally develop an “over-communication” plan to your key stakeholders. Any real or perceived gap in communications will be filled by the grapevine and nothing good ever comes of that.

A few great online resources to guide you through the entire process:

• The MergeMinnesota Guide to Nonprofit Mergers
• The Nonprofit Mergers Workbooks from La Piana Consulting
• Mergers as a Strategy for Success from the Metro Chicago Merger Research Project

See also:

• Should You Be Considering a Merger?
• Thinking About Whether to Close Down

Good luck, remember to keep your eye on the mission/vision and over-communicate at every stage of the process!

About the Author

Ron Kratofil

More Posts

Ron Kratofil has served as president of Goodwill Industries in Lancaster, Pa. since 1991. He retired from that post in July of this year. He is a member of the Pennsylvania Workforce Development Board, the Rotary Club of Lancaster, and is the director of William Penn Human Services. He is also a facilitator for Leadership Lancaster Board Leadership Academy.

• Ron Kratofil

  https://blueavocado.org/author/ron-kratofil/

  In the Boardroom: Asked to Join that Board?
• Ron Kratofil

  https://blueavocado.org/author/ron-kratofil/

  In the Board Room: Staying In the Loop And Out Of the Weeds