Assessing a Potential Merger:
Made in Heaven or Doomed to Fail?

Nonprofits face many of the same challenges as their for-profit counterparts, including shrinking resources, cash flow problems and competitive threats. To survive, many not-for-profits are following a cue from the corporate world and taking the plunge into mergers.

Take two environmental organizations that merged. Although they both focused on improving river water quality, their philosophies were different. But they were able to set aside their differences because they realized that merging could bring far more success — including increased public visibility and fund-raising power — than either organization could have achieved on its own.

Merge for the Right Reasons
When should you consider combining resources with another nonprofit? A financial problem stemming from steady declines in grants and donations is a legitimate motivator. Duplication and overlap of services and mission may be another valid merger trigger. Bringing organizations together can be a powerful way to build unity, accelerate mission achievement and use dollars more efficiently.

For instance, a smaller nonprofit with a solid program and good but modest record of achievement may seek a merger with a cash-rich larger organization that needs to strengthen its programs in the area of the smaller nonprofit’s expertise.

You might also consider joining with another nonprofit to gain access to a larger skill set. Perhaps another organization has an outstanding and dedicated staff, while your organization has excellent fund-raising skills. Combining forces may enable you and the other not-for-profit to provide better services and maximize capabilities.

There may also be some good reasons to consider merging with a for-profit entity. Doing so can boost funding, raise the nonprofit’s profile and reduce administrative expenses. Keep in mind, however, that tax and legal complexities come into play. For example, an arrangement with a for-profit partner can’t involve the nonprofit improperly transferring assets to its for-profit partner. The IRS has stiff penalties for transactions that improperly reduce a nonprofit’s assets.

Look Before You Leap
If you’re mulling a merger, think about what you really want to achieve. Develop specific, realistic goals stated in measurable terms, such as striving for a 30% increase in donations or being able to serve an additional 500 people each year.

Also, assess your ‚readiness to be a partner. You’re a much better candidate for a merger if you know what you want to accomplish, understand your strategic challenges, have a strong board/management relationship, are growth-oriented, and have a history of successful risk-taking.

Know What You Can Lose
Before you jump into negotiations, realize that mergers do have risks. Several common problems can arise.
To begin with, few organizations realize just how much time is needed to successfully merge two entities. Depending on the size and complexity of the organizations, a merger can take up to two years to complete. Mergers can be expensive, particularly because outside experts, such as consultants, tax advisors and attorneys, are needed to assist with the process.

Look out for legal or regulatory hurdles. Many states have specific procedures that must be followed and forms that must be filed when nonprofits merge. And you may need to get consent from donors to legally transfer gifts or grants.
Beware of culture clashes. It may be difficult for individuals to set aside their differences and work in the spirit of cooperation. Fears, egos, politics and personal concerns are all likely to be visible as everyone struggles with making major organizational changes.

Moreover, potential partners must get buy-in from everyone, including funding sources, staff and other stakeholders. Disregarding concerns won’t make the process any smoother and may jeopardize the merger.

Find the Right Fit
Ultimately, a merger will be successful only if both organizations conclude that the benefits of collaboration outweigh any drawbacks. If you and your potential partner both are confident you can work effectively as a unified force and resolve any differences, you’ll be poised to enjoy a solid partnership.