Over the past few years an increasing number of nonprofit organizations have considered the possibility of merging with another nonprofit organization. This is due both to the impact of the economic crisis on nonprofit organizations, which has greatly reduced public support and other revenues, and a growing trend toward consolidation of services.
So what does a "merger" mean, and how do you go about considering the possibility of a merger? Here is a starting point:
- "Mergers" Can Refer to Many Different Forms of Combinations. Mergers span a broad spectrum of alternatives. "Statutory mergers" are creatures of state corporate law, require specific corporate approvals and state filings, and result in the legal combination of two entities into one single surviving entity. On the other end of the spectrum are "collaborations" between organizations. Collaborations are mutual understandings between two or more organizations on how to join resources for a common goal. Between statutory mergers and collaborations are other potential alternatives, such as joint ventures or partnerships, which are documented in a written joint venture or partnership agreement, with a mutually agreed-upon organizational structure.
The key is recognizing alternatives exist and one size need not fit all.
- Due Diligence. When considering a combination of two organizations, the first step is due diligence. Initial due diligence, however, does not mean attorney or auditor review of legal contracts or financial statements. Rather, the first step is obtaining an in-depth understanding of each other's organization. How are they managed, how are they governed, what is their culture? What are their most significant outstanding issues, and how are they addressing those issues? What is the appetite for a merger or other collaboration among their governing body and within their staff? What are their financial resources, and how are they addressing any weakness or insufficiency of financial resources? What is their strategy for accomplishing their mission?
These are just some of the initial due diligence questions, all of which need to be fully answered in order to better assess whether a merger or other collaboration is likely to lead to success.
Once you are further along in the process and have reached a general meeting of minds, more traditional due diligence needs to proceed, and each organization needs to be willing and prepared to open the tent to the searching eyes of the other organization and its professionals.
No one wants, or responds well to, surprises, and openness is key to any successful combination. When problems or significant issues arise, it is far better to have them addressed early in the process when calm and reasoned thinking can find solutions, rather than late in the process, when such issues can potentially undo a proposed combination.
- Confidentiality. Confidentiality between two organizations discussing a possible merger or collaboration is most important. Each organization needs to carefully guard not only the confidential information it provides to the other organization, but also the confidentiality of the very fact that discussions are occurring. In the very early stages, this is more easily accomplished than as time goes on and more individuals are added to the process, both from within each organization and outside the organizations.
Organizations should assume that rumors or news of a potential merger or collaboration will occur, and both organizations need to be prepared and to coordinate how best to respond to and address such rumors or news, both with their own staff as well as with their outside constituencies and the general public.
- What Will You Look Like? Certain fundamental questions need to be considered early on. What will the governing body of any combined organization look like, and who is to be included in a new or combined governing body? Who will be the top executive of the combined organization, and how will that person be chosen? What role will be assumed by the chief executive of the other organization, if any? Which organization will play a greater role in any combined organization, or is it meant to be a "combination of equals" (It seldom is)? What will the reaction of each organization's staff likely be when faced with the prospect of a collaboration? What will the combined staff look like, and are staff reductions likely? Is the organization prepared for the likelihood of losing good people who simply do not wish to be part of a combined organization?
There are seldom any clear or easy answers to these fundamental questions. Further, the original plan with respect to one or more of these matters may and likely will change over time. However, being open and realistic about each of these areas is critical in the road to a successful collaboration.
- Balance the Positive With the Negative. Nonprofit organizations are generally unlike private industry when it comes to mergers and collaborations. Private companies are often more willing and able to take the hard actions necessary to make a merger or similar combination successful. Very often private industry is also more adept and experienced at accomplishing mergers and acquisitions, generally with a closetful of past lessons and hard-earned experience in what not to do in future transactions. Private industry also generally has the human and capital resources available to approach and complete mergers, acquisitions and other combinations.
The nonprofit sector, as a whole, is generally far less experienced in accomplishing mergers and other combinations and may tend to focus more on the potential significant benefits and positive results without equal weight being given to the problems and difficulties that inevitably accompany any significant combination. Going in with your eyes wide open is important.
- Timing. Completing a merger or other collaboration takes considerable time, no matter what the desires of the parties. The thoughts, insight and sensitivities of each organization's governing body and staff need to be carefully addressed, and all of the structural aspects of any combination need to be fully thought out and mutually resolved, which generally takes more time than expected.
The best approach in considering any potential combination of organizations is to do all of your homework, particularly as to governance, staff and culture. Structure should then follow, not lead.