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Merger Strategies for Not-for-Profit Organizations

April 10, 2012

How nailing the details can be the key to a successful merger.

There has always been a great deal of pressure on not-for-profit organizations to maximize their operational efficiency and achieve their mission at the lowest possible cost. The current economy and the recession of the past few years has exacerbated that situation. Pressure at the federal, state and local government level has also eliminated or reduced grants, with those that remain available harder to come by, and the selection process much more competitive.

The response to this situation has many organizations searching for strategies to reduce their costs while continuing to accomplish their mission. A growing number of organizations are forging agreements with other entities either with a similar mission or serving a similar geographic location in order to share costs and reduce their overall cost structure. These agreements can take several different forms but generally fall into one of two broad categories: the formal merger and the more informal partnership agreement.

In a formal merger, two or more organizations legally combine into one. The goal is usually to develop program synergies across a broader geography or extend current programs to a larger recipient base. The hope is that support services – administration, financial, human resources and information technology – will be combined and will be less than the sum of the individual parts. The danger in this assumption is that the sophistication of the systems in two or three smaller organizations is insufficient in a much larger entity. A formal human resource function, which may not have even existed in any of the smaller organizations, may be essential to an organization that is two or three times the size and now with multiple physical locations.

In an informal affiliation agreement, organizations share resources, ideally resulting in savings for both entities. Usually these agreements are aimed at back office administrative support savings. While such affiliations might appear easy to craft, both organizations should perform their due diligence with the aim of crafting a well defined service level agreement so that cost savings are realized without compromising effective support for either organization.

Who are the best candidates for a formal merger? Entities that share a common mission and a similar service market make the best merger candidates. During the pre-merger process, executive teams and boards need to look closely at the culture of both entities and how the decision-making process and strategies will come together. Developing an integration plan with an eye toward what the new processes and systems will look like and how the organizations will do business on a combined basis is critical. Each organization will likely have to change even though one legal entity will survive and one will disappear. Identify the strengths and weaknesses of each organization and work to capitalize on the strengths and improve the weaknesses.

Among the differences between organizations that must be carefully ironed out are compensation and benefits. The retention of key employees is critical as is the need to eliminate duplicate positions. All of these issues take time to investigate and develop solutions for. Management, which already had a full-time job prior to the merger process, could easily be stretched beyond their capacity. One way of alleviating this is to bring on additional, temporary help in the form of volunteers and consultants. In addition, if the time table for the process is lengthened, it allows for management to devote the needed time in less concentrated amounts, freeing them up to continue to address their normal responsibilities.

KLR is one of the top 10 firms in Boston, and is unique because they service over 220 not-for-profit organizations with compliance and consulting services. KLR’s Not-for-Profit Services Group issues whitepapers on various topics that help our clients with the day-to-day operations of their organizations. Additionally our weekly e-newsletter provides up to date information for nonprofit organizations. Sign up for the KLR E-newsletter now.

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