Frequently Asked Merger Questions

The most common scenario for nonprofit mergers is when a nonprofit’s business model is not sustainable for the long term, yet the organization still has significant assets – not only financial but also its people, brand and systems. It has enough assets to limp along, yet recognizes that its future is constrained unless it identifies a merger partner with enough complementary assets to make the consolidated organization strong enough to thrive.  In such a case, here are answers to some common questions:

Will staff lose their jobs?
Most nonprofits are not large enough for many, or any, staff positions to be eliminated.  Front-line program staff are critical to provide services.  Other than departures chosen or planned by staff members themselves, due to poor performance, or an inefficient function or department, most nonprofit staff members typically retain their jobs.  These mergers still create greater economies of scale and build capacity.

How do we find the right partner?
Most often, the right partner is an organization with program similarities and with whom you have had a relationship already. Whether the list of possibilities is geographically based or more related to program and service synergies, you can typically perform an analysis beginning with a relatively short list.

Is the process complicated?
Let’s just say there is a lot of process involved!  Mergers necessarily involve planning for dual scenarios – if the merger is successful, and if the parties decline to merge.  Expectations, hopes and fears of all parties need management, and there is team building within and across organizations required, often with dual reporting relationships for some period of time.

The sequence of events and how they are framed can make the difference between smooth and rocky processes; don’t tackle trickier issues until the appropriate time.

A facilitation process should be prepared to address misunderstandings, relationship problems, etc. that often involve autonomy, self-interest, politics or culture.

How long might the process take?
Depending on the size and complexity of the organizations involved, including all feasibility analysis, due diligence, through the structuring of the deal, a merger may require a 3-4 month timeline for a simple set of circumstances to as much as 2 years or more for a complex set of circumstances.

Most experts also agree that full effectiveness can only be achieved years after a merger is legally closed, once the organizations have integrated systems, and ideally, developed an effective culture as an integrated entity.

How much might it cost?
Some of the larger and more common costs may include brand/materials development, legal and consultant costs, the cost of systems integration such as financial management and I.T. systems, severance package(s) and moving costs.  You may be able to seek institutional funding to cover such one-time costs

For a more complete description of nonprofit mergers, download this comprehensive PDF presentation on the subject.

Frequently Asked Turnaround Questions

How many nonprofits face elements of “struggle” or crisis?
While there is no concrete data on this subject, the vast majority of nonprofit leaders interviewed in 2008 felt the number was greater than 25%, and quite a few felt that over half the sector is in such condition …. And that was prior to the Great Recession!

Are there certain characteristics of the sector that make it hard to operate in?
The nonprofit sector is a difficult operating environment, for example:

  • Most nonprofits are small, 50% < $1M in revenues, 90% < $5M
  • Nonprofits are constantly being asked by funders to do more with less
  • Nonprofits face regulatory constraints that often, for-profit businesses don’t
  • There is a chronic underinvestment in capacity building and training, with the average nonprofit able to devote < 1% of their budget to professional development and infrastructure development
  • Executive compensation is very low compared to the private sector
  • Extreme changes in the financial environment such as the Great Recession have make the trickle-down from the larger economy to the nonprofit sector more tenuous

In short, how can nonprofit leaders move from struggle to success?
Despite the nonprofit sector’s complexities, most nonprofit declines and crises are caused by factors within management’s control. Yet it takes courage for the board to recognize the depth of the problems and initiate a turnaround.

For example, our research shows that financial problems are often caused by problems with internal culture and communications that prevent leaders from understanding the underlying problems and their causes, and most importantly, prevent implementation of effective solutions.

What is the top priority when facing a crisis situation?
When faced with a turnaround situation, after summoning the courage to act, the board’s top priority task is to establish the leadership team to guide the effort. At the center of this requirement is the staff leader, typically an Executive Director, with relevant turnaround experience. Interim Executive Directors and consultants are the most common leaders with turnaround experience.  Sometimes, permanent EDs  can be found with such experience.

Regardless of what type of leader is in selected, the situation must be described in the search process. For example, if you are hesitant to fully publicly disclose the situation, or that you are seeking someone with turnaround experience, a job announcement can say:

“Seeking someone who has led significant organizational change processes, including one or more of: organizational restructuring, cost-cutting, and overhaul of internal systems.”

For a more complete description of nonprofit mergers, download this comprehensive PDF turnaround presentation.

Or, purchase Nonprofit Turnaround: A Guide for Nonprofit Leaders, Consultants & Funders; 2010