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July 10, 2023 Expert’s Corner

Nonprofits: Don’t fear the merger

Brian Kelleher
By Brian Kelleher and Amber Tucker

Mergers among nonprofits are less common than in the corporate world, but they can have many advantages.

Amber Tucker

Done properly, a merger can preserve the elements of an organization that are working well, while cutting costs by eliminating redundancies.

How are nonprofit mergers different?

Private companies typically welcome acquisition as a sign of successful growth, but nonprofits have not traditionally held that view. Nonprofits tend to seek mergers only when they’ve exhausted all other options.

Still, considering the potential advantages, it’s a mistake to see a merger as a last resort.

Another difference is that a nonprofit merger doesn’t involve buying interest in a company. The merger process instead relies on the board of directors at both organizations reaching an agreement.

Striking that agreement can be difficult, even if financially it’s the right thing to do. Merging with a larger organization may mean that only a few of the smaller entity’s board members will carry over to the new organization, so they won’t have as much representation on the board.

Even those board members who stay on may be hesitant to relinquish control over their organization’s mission and management, especially if they have had an active governance role.

Advantages of merging

Nonprofit mergers can represent a huge cost savings. Think about how much you are spending on the administration side of your organization.

If a community has two nonprofits that are doing very similar things, they could both benefit by combining forces — maintaining their programs but spending less on office costs and other expenses that can be shared rather than duplicated.

In addition, it may be beneficial for the individuals obtaining services from these merging nonprofits.

For example, if a behavioral health and a drug and alcohol recovery facility merged, a consumer could receive both services from one location.

Reducing the amount of money that goes into administration means you can channel more of your dollars into the mission.

That’s a clear win.

Tips for a smooth merger

Being proactive when considering a merger, rather than waiting until you have no choice, gives your organization more time to plan. Because board member commitment is such a key part of nonprofit mergers, success requires spending a lot of time talking things through before starting the process.

Timing matters, too — for example, the retirement of an executive director may be a good time to consider merging.

What exactly will the merger look like? How similar are the missions and cultures? Is there clarity and agreement about which parts of each organization will be kept? Are any board members or executives likely to have concerns or objections?

It’s best to avoid last-minute surprises.

Make sure your accounting and legal ducks are in a row — not only the accounting of the actual transaction, but also the financial health of each entity involved — before you start the merging process. This is easier than it used to be, because most nonprofits have modernized their record-keeping systems in recent years.

If you’re the acquiring organization, make sure you evaluate each program before bringing in one that has historically generated losses — a nonprofit that is failing because it’s not getting enough funding to run the program — unless you have a specific plan to change that.

Simply merging won’t suddenly make a failing program able to sustain itself, even if you’re saving on administrative costs.

On the other hand, a strong nonprofit can sometimes rescue a smaller one that’s losing money but provides a necessary service to the community. The point is not to go into such a merger blindly.

It’s also important to consider how you’re communicating the merger to stakeholders. The community may have concerns about how this change will affect the services it relies on.

If a local organization merges with a larger nonprofit that serves a broader area, donors may worry that the new entity won’t have the same local feel. They may be less willing to give if they don’t have the sense that the new organization serves their immediate community.

The way you describe the merger with donors and the wider community will have an impact.

While we may think of private companies when we hear the term “merger,” there are many reasons nonprofits may pursue this route.

Keeping an open mind about mergers — and following best practices — can lead to a successful future for many nonprofit organizations.

CPAs Brian Kelleher and Amber Tucker are partners at accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs).

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