The financial and operational benefits of nonprofit mergers and acquisitions

It’s a challenging moment for nonprofits. Organizations face headwinds like political uncertainty, changes in tax law and growing competition for donors, grants and other funding.

But bold moves like nonprofit mergers and acquisitions (M&As) offer leaders an opportunity to use these challenges to grow stronger. While you may associate M&As more with the for-profit business world, there’s a long tradition of nonprofits joining together to pursue growth.

Today, that tradition is ripe to expand. Keep reading to learn why an M&A can benefit your organization, what the process looks like and how to overcome common pitfalls.

Why the nonprofit M&A market is growing

There are many reasons why the M&A market is heating up. Many organizations are looking for solutions to these challenges:

• Cuts to federal grant money
• A limited pool of private grants
• Unreliable individual donations

At the same time, many nonprofits provide similar or overlapping services. If two organizations do essentially the same thing for the same constituents in the same market, they are competing for the same dollars. This increases the odds that both organizations will fall short of the resources needed to fully deliver on their missions.

However, this competition also offers an opportunity for collaboration. Nonprofit leaders increasingly view overlap not as a problem but as a potential solution to funding challenges, as two organizations operating in the same space may be a great fit to merge.

Why should a nonprofit consider an M&A?

When should you start thinking about evaluating the M&A market for your nonprofit? Here are some key factors that may lead you to consider what’s possible in the M&A market.

Note that many of these factors are not necessarily problems or negatives, but rather opportunities to better serve your constituents.

• Commitment to capacity building: If your nonprofit feels like it’s reached its current capacity for growth, you may do well to explore whether an M&A could expand your reach.
• Downward spiral: If your organization is really struggling, whether financially or for other reasons, you may want to think about a major change. Think about which elements of your nonprofit are the most effective and whether those might better serve constituents by joining another organization.
• Organizational performance: Maybe you’re great at your mission, but building an organization is more of a challenge. In this case, you might thrive by coming together with another nonprofit that’s especially good at the business side of things.
• Innovation: The nonprofit world is changing. Collaboration can be a way to combine two great organizations into one that’s better positioned to adapt. Can you turn 1+1 into 10?
• Strengthening your mission: If a merger or acquisition could help you better accomplish your mission or help your constituents, it may be worth pursuing.

How are nonprofit M&As different than the private sector?

It’s worth noting that mergers and acquisitions in the nonprofit sector differ substantially from those in the private sector. Instead of prioritizing profit or market share, nonprofit M&A focuses on maximizing mission impact, consolidating organizational strengths and increasing effectiveness.

A merger also often has a different structural outcome than an acquisition. While a merger frequently entails combining two organizations into a single, unified entity, an acquisition typically involves one nonprofit absorbing another’s assets, programs or operations.

What should nonprofits look for in a potential M&A partner?

If you’re considering an M&A, you’ll want to create a prospect list of nonprofit organizations you may want to merge with, acquire or be acquired by. Here are five qualities to look for when vetting potential partners:

1. Strong mission alignment and/or synergies: Do you do the same work or have missions that complement each other?
2. Similar organizational culture: The success of an M&A will usually come down to culture and people. Are your cultures a good fit to merge?
3. Healthy financials and operations: If a potential partner’s finances or business operations are in bad shape, that could be too much trouble to take on.
4. Stakeholder support: Do you have buy-in from your stakeholders?
5. Clear strategic benefits: Finally, does a potential M&A offer clear benefits to your organization and fit your strategic plan?

When is an M&A a bad idea for nonprofits?

M&As are not right for every organization. If your nonprofit has strong financials, an excellent board and leadership team, great programming, a robust strategic plan and a strong overall growth trajectory, you probably have little reason to consider one.

What are the benefits of mergers and acquisitions for nonprofits?

An M&A is a lot of work for both your team and your deal partner. So why should you be excited about taking one on?

Here are some of the key benefits an M&A can bring to your nonprofit:

Scale to meet growing demand

 A merger or acquisition can bring your organization more tools and resources to carry out your mission or reach a larger number of constituents. Done right, you’ll gain a larger footprint to carry out good, influence lives for the better and make a positive impact on the world.

A stronger financial footing

Especially if you’re competing for donor dollars with another similar organization in your market, an M&A can be a game-changer for your finances. Rather than getting only a portion of available donations, imagine what you could do by combining donor bases.

A deeper talent pool

Joining with another organization makes as big an impact on your talent base as on your finances. Not only will you be able to collaborate with existing talent at the other nonprofit, but with your combined resources, you’ll often have an easier time hiring and retaining.

Better operational infrastructure

Functions like HR, marketing, fundraising and grant pursuit are essential to nonprofit success — but they’re not every org’s strength. An M&A can be one way to address this, bringing together the best parts of both organizations’ infrastructure.

What challenges do nonprofits experience during an M&A?

Merging, acquiring or being acquired by another nonprofit is usually a long, complex process. The benefits can be huge, but you shouldn’t sugarcoat the challenges either.

Here are six major potential roadblocks to keep in mind:

1. People and culture

You’re combining not just services or infrastructure but also two groups of people. When the personnel from two organizations come together, questions will arise, including: What will the power dynamic look like? Who will be the new CEO or director?

Different versions of these same problems will play out across the rest of your organization as well. So, what to do?

• Define your culture: If you know what cultural factors make your team effective, you can work to preserve and even strengthen those factors during a merger.
• Identify each group’s strengths: Ask yourself: What is your team best at? What is your deal partner better at? What is each organization’s secret sauce?
• Create a buddy system: Pair up employees from the different organizations. This can help bring the two teams together and, if one nonprofit is acquiring the other, give team members from the acquired organization someone to go to with questions or when inevitable issues arise.
• Designate change champions: Identify team members who can be resources for their peers to go to as they seek to navigate the transition period.

2. Communication

This is often both the single biggest challenge and key to success in any nonprofit M&A. If you don’t communicate, your merger will likely struggle, as your team members won’t understand what’s happening or how they’ll be affected.

But if you communicate effectively, you can make the journey considerably easier.

• Prepare both an internal and external strategic comms plan: The goal should essentially be constant communication, especially with your own team, so that everyone feels informed and engaged with changes as they occur.
• If possible, communicate before, during and after the M&A process: This communication should continue for at least a year from the date the two organizations first begin merging.
• Never tell people things won’t change: Always be honest and transparent.
• Communicate to your team: With your team, start by explaining why an M&A is happening, what’s in it for your team and how it will help you better serve your constituents.
• Don’t forget to engage outside donors or other key stakeholders: You don’t want to get halfway through a merger only to find out your biggest donor doesn’t like the idea. Be prepared, you may need to work with donors around funding restrictions written into wills or donor agreements.
• Enhance transparency: The M&A process is highly confidential, so you may not be able to share everything right away. But your goal should always be maximum transparency, given the constraints.

3. Insulated leadership

During a merger, employees on the ground may be struggling with major issues that don’t reach the ears of leadership or the board. And this disconnect can slow or even sink two organizations’ ability to join together.

That’s why communication should come from, not just the top down, but also the bottom up. Leaders should encourage employees to offer feedback and actively seek it out.

Some of this can be via official forums, like an open-door policy or employee town hall meetings. But it’s also essential for leaders to look for unofficial feedback by building relationships with team members who have a better understanding of what ordinary employees are going through.

Humility and vulnerability are key qualities for leaders to cultivate here. Those who are willing to hear tough feedback are far better positioned to navigate change than those who’d rather ignore it.

4. Legality and finances

Legal considerations can slow the merger process to a crawl. For example, legal restrictions around essential funding pools might require a great deal of time, money and finesse to circumvent.

You’ll typically need seasoned guidance to navigate such situations. Consider engaging an advisor early in the M&A process who can help you identify potential legal challenges before you’re in too deep and decide if and how you can navigate them.

5. Technology

A merger usually means either combining two different organizations’ tech stacks or transitioning one team onto the other’s systems. This can create major headaches.

• Think of tech as a part of due diligence. For example, if your organization would like to move onto your deal partners’ ERP platform, will your current provider let you out of your contract?
• How will the merger affect your data? Are you going to have a blackout period? Could you lose data during a tech integration? Will your system be able to onboard new clients after the move?

6. On paper versus reality

A final challenge area is the difference between how an organization looks on paper and how it actually functions. This distinction is tough to assess before an M&A closes, because it’s something you figure out from working within an organization.

Be prepared for practical organizational realities to interrupt your plans. Consider that as a result, bringing two nonprofits together may take longer and be messier than you expect.

How much risk are you willing to accept here? How much downtime can you live with? There’s no one answer to these questions, but they’re important to ask.

What are the steps in the nonprofit M&A process?

A merger or acquisition of nonprofit organizations is a journey. It will often take years. But here are the seven basic steps most nonprofits go through along the way.

1. Create a strategic vision

Successful M&As start from a place of clarity and vision rather than doubt and fear. Take the time to sit down with your board and map out where you want your organization to go. What could the future look like?

Once you have a vision, ask yourself whether an M&A could help you get there. At this point, start thinking about what kind of organization you might want to partner with. Would a merger make more sense, or an outright acquisition? Or are you better seeking to be acquired? There are no wrong answers here.

Put all of this together into a strategic plan that can guide you as you move forward.

2. Make a prospect list

Build a long list of organizations that might make sense to join forces with. Then take your long list and cut it down to a short list.

3. Explore M&A possibilities over time

Start having conversations with leaders at the nonprofits on your short list. At the beginning, your goal should simply be to find out if there may be opportunities for collaboration.

Think of this like dating. Don’t propose marriage right away. Instead, focus your early discussions on if or how your two organizations could try working together on a particular problem or area of service.

As conversations evolve, you can consider bringing up the idea of combining organizations if it makes sense.

4. Engage an advisor

As your discussions with other nonprofit leaders get more serious, you should bring on an advisor to help you navigate due diligence, closing the deal, legal issues and post-merger complications.

5. Conduct due diligence

During this phase, both nonprofits agree to be open and honest with each other about financials, services and operations. You’ll need NDAs early on and then enough time to do a deep dive into a potential deal partner’s books. Typically, this process can take a year or two.

6. Initiate closure

If both partners are ready to join, shake hands on the deal.

7. Begin integration

This is the long-term process of bringing your two organizations together. Be prepared to spend at least a year doing this. Put your people at the center of this process and it will go much smoother. As noted above, communication is key here. Explain why things are changing and how people will be affected. Get everyone excited about your strategic vision.

How Wipfli can help

We advise nonprofits on how to grow, overcome challenges and navigate change. If you’re curious about whether an M&A could serve your nonprofit or are already beginning the process, ask us for help to navigate the deal and what comes after. Learn more here.

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