4 Key Considerations When Undergoing a Nonprofit Merger

Nonprofit mergers can be incredibly powerful tools to provide organizations with a greater ability to achieve mission success. Bringing together two organizations in a single geographic area serving similar or the same group eliminates administrative redundancies and therefore redundant expenses that do not contribute to the nonprofit’s mission. Two homeless shelters serving a community can avoid inefficiencies through merging. These organizations experience the benefit of combined assets but no longer have to pay two directors, two development staff, and so on. Now let’s look at an important distinction before diving into the four strategies. A merger is a term that refers to the process when two organizations become a single firm rather than remain separately owned and operated. This combination is usually achieved through the dissolution of one organization and transferring its assets into another. An acquisition describes a transaction where one organization purchases another and incorporates it into its operational structure. Acquisitions are often used to expand geographically where an organization acquires another in a different state and continues to run it under a new name. 

Do Your Research 

Mergers are complex processes that require care and due diligence. Executing a merger properly provides a massive strategic advantage, but do it wrong and you can create many unnecessary problems immediately and down the road. When designing a strategy for the merger process, the primary theme ought to be due diligence. How will the scaling of operations affect the nonprofit’s mission and ability to achieve mission success? What organizations and operating principles will improve our own organization and success? What resources can an organization provide and is it sufficient to handle the costs of a merger? What culture and mission does an organization have and how does it complement our organization? These are some questions to consider as your organization considers a merger. Consider these and address other questions that arise from these inquiries. Having a thorough understanding of outcomes and potential challenges is key to making an informed decision that will provide your organization with competitive advantage rather than an anchor dragging you down. 

IRS Designation 

Merging organizations generates many legal and professional designation challenges. Nonprofits enjoy specific benefits based on their IRS designation and these benefits are extended to donors in order to increase and maximize their gifts. Taking care when combining organizations is key to maintaining the desired designation and allowing for a stable transition in terms of development and fundraising. The IRS lists explicit rules for tax-exempt organizations that “end their operations, either through shutting down, transferring their assets, or merging with another tax-exempt organization.” The guidelines require that the IRS be informed of the action. Organizations typically inform the IRS through filing a final form 990, 990-EZ, or 990-N. Additionally, organizations should consider asking for a private letter ruling on the tax consequences of the merger. This specific ruling confirms that the tax-exempt status is not lost for the resulting organization post-merger. Because of the critical importance of tax exemption for nonprofits, it is highly valuable to have absolute confirmation of tax exemption. 

Synergy and Integration 

When merging organizations, you have decisions to make that involve more than just numbers. Mergers are much more than a combination of assets. Nonprofits are full of passion, emotion, and serious commitment from individuals, communities, and cultures. Recognize this and plan for how to approach the combinations of operations and cultures. Many nonprofits have been in operation and have operated the same way for extended periods of time. Changing this up can turn up some chaos, so it is important to consider how to best create a working environment that achieves operation and personal success for all parties. It is an unfortunate and real cost of a merger that not all parties will remain the same. While painful at the outset, changes for the sake of efficiency are important in the long term. Plan ahead for instituting a new culture and make all decisions with firm and fair leadership. This will help produce a smoother and successful transition rather than allow some staff to do things one way and others to stick to their traditional operations. Secondly, full-scale integration is where nonprofits can feel the incredible benefits of a merger. Integration is where organizations can eliminate redundancies and maximize mission impact. Two soup kitchens merging into one can shift to a single, large kitchen where meals can be made in bulk. Additionally, supplies can be bought and stored in bulk. Taking advantage of economies of scale is an immediate advantage available to merged organizations. 

Donor Restrictions 

Donor restrictions can prevent a smooth merger or even a merger at all. Common at large and endowed institutions, donors give legacy gifts with strings attached. An institution (like a university) that was created by the will of a donor can often be prevented from changing the “original intent” of the donor’s creating gift by merging with another institution. There have been cases that have gone to court, including state supreme courts. The result is extreme costs on all parties when the whole point of a merger is to maximize value and strategic advantages. Additionally, merging an organization with an endowment introduces a multitude of complexities that typically require the help of legal counsel. Attempting to shift endowment funds can create charter, investment policy, and other conflicts under a new organization structure. Advance cautiously when approaching a merger involving these factors and return to our first tip and do your research thoroughly. 

Mergers are powerful tools that can be used to the benefit of nonprofits. A well-executed merger can create strategic growth, shore up their financial position, and help increase impact and mission success. Using these strategies will help make sure your organization does not suffer setbacks and struggle with lasting problems from a poor merger. While these are great tips and strategies for successful mergers, it is important to have the proper mechanisms in place to execute every part of a merger financially, legally, and structurally well. It is advisable to engage legal, accounting/financial, and merger services staff to ensure all procedures are done properly. 

A merger is a significant and often challenging process. Mistakes can trouble an organization for years to come. NMBL Strategies provides experience and leadership to oversee nonprofit mergers and ensures that the process will achieve the strategic advantage needed for your organization.