Non-profit mergers aren’t the “easy way out”

At the end of 2011, I wrote a series of blog posts focused on predictions for the upcoming year. It seems as if my post on December 28, 2011 titled “2012 Non-Profit Trends and Predictions: Contraction Continues” hit a nerve with some of you. There isn’t a week that goes by without someone engaging me in a discussion around collaboration, strategic alliance, merger, acquisition, and outright sale.

None of this surprises me for all of the reasons I wrote about back on December 28th. However, the thing that is a little interesting has been the manner in which people are talking about the subject. At least in my conversations, this subject has been framed as the “perfect solution to get out from underneath our financial problems“.

While it is true that most non-profit mergers and acquisitions are inspired and motivated by financial crisis, it is important to remember that there isn’t a large group of non-profits sitting on the sidelines with a large wallet of cash just waiting to bail you out.  Let’s please get real for a moment.

  • There needs to be “benefit” on both sides of the merger equation. Figuring out what motivates each party is important, and it is one of the first steps.
  • Mergers don’t happen overnight. A due diligence process must be established with representation from all sides. This process will include discussions ranging from developing a case for change to addressing how to integrate systems (e.g. payroll, tech, etc) if the project gets green-lighted.
  • While discretion and confidentiality are important elements in such delicate discussions, there needs to be clear lines of communication with staff and both boards.

Engineering a merger is tough and takes a lot of time. It is NOT a quick fix nor is it the perfect solution from getting out from underneath your agency’s problems. The math supports this position. The Bridgespan Group published a paper presenting data and findings from a study that focused on non-profit mergers, and this is what they reported on the rate of success:

“We evaluated 11 years of merger filings in four states: Massachusetts, Florida, Arizona and North Carolina, and found that more than 3,300 organizations reported engaging in at least one merger or acquisition between 1996 and 2006, for a cumulative merger rate of 1.5 percent (number of deals divided by average number of organizations for 11 years).”

Does this mean non-profits aren’t as good at mergers and acquisitions as our for-profit cousins? Nope!

“This rate may seem low compared to the perceived ubiquity of M&A in the for-profit world, but it is not. The comparative cumulative total in the for-profit sector is a close 1.7 percent.”

If your non-profit organization is starting to chatter about collaborations, strategic alliances, mergers or acquisitions, I strongly suggest you: 1)  do your homework, 2) develop a process, 3) hire a consultant to help and facilitate, and 4) prepare for a long due diligence process.

I really like this online white paper by CCF National Resource Center that I found on the United Way of the Midlands’ website. Click here to read more about non-profit merger best practices.

Have you ever been part of a non-profit merger process? If so, what was your experience? Is your agency currently looking for a merger partner? If so, why and how are you going about it? Have you seen other merger attempts in your community succeed or fail? If so, what happened and why? How do you think donors should be included in a non-profit merger due diligence process without causing a crisis of confidence with lasting impact?

Please use the comment box below to weigh-in with your thoughts and opinions. Why? Because we can all learn from each other.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC!/eanderson847

2012 Non-Profit Trends and Predictions: Contraction Continues

This week I’m looking back upon 2011 for major trends, and then looking forward to 2012 with an eye towards making a few predictions. Today, we are looking at non-profit failures, mergers, acquisitions, and strategic alliances.

I have heard rumblings for years that the non-profit sector is about to experience a wave of mergers. This conversation always involves facts like:

  • There are approximately 1.5 million non-profit corporations in existence of which three-quarters are classified as “charitable”
  • Every year brings another 20,000 to 60,000 new non-profit agencies in existence (depending on what source you read)
  • Almost 25-percent of non-profits allegedly report $25,000 in annual revenue and are obviously very small (and the vast majority operate with annual budgets of less than $3 million . . . in fact most are smaller than $1 million)
  • Every year 30,000 to 60,000 non-profit organizations go out of business

In 2008, Paul Light predicted that the new economic challenges would result in more than 100,000 non-profit organizations failing over a two year period. Two years later Caroline Preston wrote a follow-up article in the Chronicle of Philanthropy and investigated whether or not this prediction actually came true. As you can imagine, the answer was difficult to ascertain, but in the end the conclusion seemed to be a resounding —  “YES“.

With so many friends working in the non-profit sector, I’ve tried to stay on top of where they perceive their agencies to be with regard to financial solvency, and I must admit that I see too many indicators pointing to:

2012 continuing (and likely escalating) the trend
of non-profit failures, mergers, acquisitions and strategic alliances.

Guidestar recently published a great document titled: “Late Fall 2011: Nonprofit Fundraising Study“. If you have some time, you need to read this report! While I am usually very skeptical about the validity of survey research, I indulge in it every once in a while. After looking at this report, I am even more convinced now that the non-profit sector is still only at the beginning of a long-term trend involving bankruptcy, mergers, and alliances because:

  • small non-profits are experiencing more financial stress than before (and I suspect many are finally at their breaking point)
  • small agencies are experiencing more donor turnover (most likely resulting from poor stewardship efforts)
  • small organizations have less money in the bank and their reserves are marginal (a bad position to be in if there is another economic shock)
  • small non-profits report are preparing to downsize staff in 2012 (not a great situation to be in when donors want to see more impact for less money)

Combine some of these generalizations with the government funding contraction trends we’re seeing, and it becomes obvious to me that more failures and mergers awaits us as we travel down the 2012 road. If you want some good reading materials on this subject, you may want to check out the following resources:

Is your non-profit organization living on the edge? Have you ever looked at merger, acquisition, or strategic alliances? If so, what were your considerations in moving forward or not moving forward? If the best time to look at mergers and strategic alliances is BEFORE a crisis, are you starting to look more seriously at these opportunities?

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC!/eanderson847