November 20, 2017
 
To Merge or Not to Merge?

By Joseph M. Giso

Nonprofit mergers have been on the rise in recent years for a variety of reasons. In New England it has been primarily due to the convergence of several factors: the high concentration of nonprofits, a slowing economy, cuts in governmental funding, and government scrutiny. All have contributed to the merger rush.

The merger process involves a varied number of internal and external factors that need to be addressed; unfortunately, it often happens that very little is discussed or put on paper. The respective entities rely on their missions to guide them through a successful merger.

To help get the process moving in the right direction when considering a merger, there are some key advantages and disadvantages to consider.

What is a merger?

A merger involves the integration of all programmatic and administrative functions of multiple organizations to increase the efficiency and/or program quality of one or more of the partners. At its core, a merger is the joining of two entities to enhance the performance of one or both organizations.

What are the potential benefits to a merger?

When navigating through the decision making process, organizations should outline the benefits they expect to gain from a merger. These might include:

Improved service to clients through:
  • Better integration of existing services
  • Offering a more complete continuum of services
  • Improved ability to offer new services
  • Leveraging the respective strengths of each organization to enhance the service delivery capabilities of both.
Stronger strategic positioning through:
  • Improved perception and/or awareness within the community
  • Increased market share
  • Stronger competitive capabilities to ward off threats from other providers
  • Increased political clout to advocate for the needs of clients and the organization
  • Proactive consolidation based on the growing trend of foundations and other funding sources that are promoting mergers as a means to strengthen providers and/or reduce the number of providers in each community.
Greater financial stability and flexibility, which give rise to:
  • Creation of operational efficiencies that save money
  • Expansion of the fundraising base.
Non-financial strengthening of the organization, which allows it to:
  • Acquire intangible assets, such as committed board members that can be redirected to the broader agenda of the combined entity
  • Apply the combined operational/administrative strengths of each organization to the new entity.
Improved conditions for staff, including:
  • Creating more varied career options for employees
  • Changing staff compensation patterns.
What are the potential drawbacks?

A merger might also bring about some drawbacks, such as:

Dilution of operational skills that leads to:
  • Expanding the scope of programs beyond what can be managed properly
  • Reallocating workloads of one organization to the existing staff of the other organization, especially for administrative tasks, causing an overload situation.
Clash of cultures or people.

Costs and time required for a merger, including:
  • Cost and time of conducting the merger process and reaching agreement
  • Cost and time of properly implementing the merger after the agreement is signed.
Financial uncertainties, including:
  • Uncertainty about future funding for programs
  • Dilution of fundraising talent or focus.
Assumption of debt or liabilities of an organization, especially surprise obligations.

Legal or regulatory obstacles.

Resistance to the merger from funding sources, clients, staff, or other stakeholders.

Other factors to consider

Grantors of funds restricted for specific programs or endowments may need to be contacted about the merger to secure their consent to the transfer of funds at issue.

Additionally, matters such as absorption and legal responsibility of debt, the actual and potential liabilities of the nonprofits, lawsuits, contract disputes and/ or judicial decrees, labor union contracts, membership contracts and such, will need to be fully disclosed and investigated.

Conclusion

Combining two complex organizations that have distinct personalities and multifaceted missions can be a challenging but effective way to advance a cause. But be sure to investigate all the options, evaluate the full impact of a merger, and consider enrolling the help of a seasoned advisor.

Stay tuned for Part 2 of this article, The Roles of Key Players in Mergers.

Joseph M. Giso is senior tax manager at MFA-Moody, Famiglietti & Andronico. For more information, please contact Joyce Ripianzi, partner at MFA-Moody, Famiglietti & Andronico, at jripianzi@mfa-cpa.com.

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