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Merger of equals: How M&A can benefit not-for-profit succession planning

November 17, 2014


Mergers are becoming more common for not-for-profit organizations, as multiple groups realize that it is better to work together rather than compete over the same donor base and mission statement. This rise of “mergers of equals” is a sign that many executives are quickly realizing that consolidation can provide many benefits, including more stable finances and a higher rate of mission success.

These aren’t the only positives that can come out of a merger between two not-for-profit groups. One common strategy today is the use of a merger as a succession plan – where one company realizes that the best way to transition out of current leadership is through the combination with another, mission-aligned organization. Succession planning and M&A activity can go hand in hand, but there remain plenty of considerations for not-for-profit groups before moving forward with this decision.

When looking through the lens of succession planning only, there are several elements you have to keep in mind. You must determine who is next in line. If that person can’t be found within your organization, it may be time to look to another organization or a new hire altogether. Figure out early on who can take over the reins. Once this person or group is identified, begin training them on running the not-for-profit. Remember to train a replacement for their existing position as well.

Prepare for future changes
For starters, merging two like-minded organizations can prove challenging, especially when succession planning is the impetus of the transition.

These challenges include, but aren’t limited to:

  • Differences in management style
  • Employee turnover due to opinion of merger
  • Resistance to change
  • Feelings of “Us vs. Them”
  • Operational system differences

A significant percentage of all mergers in the not-for-profit sphere are related to succession planning in some capacity. A pending retirement, a desire for a new direction or finances all factor into the decision to combine with another group. The problem is that merging for the sake of merging – or as an escape route – can lead to legitimate roadblocks.

Analyze the deal before moving forward
With these challenges in mind, your organization can avoid unnecessary complications with a merger by first analyzing the deal, well before you commit to this strategy.

For starters, you must find the proper candidate for this type of transaction. You can do this by matching your culture and mission to another not-for-profit as closely as possible. It will also be beneficial to involve the board members in this process to provide additional perspective.

Proper due diligence beforehand can help you improve your staff and your mission. Employees can view a deal as a positive development step forward, since it shows that executives are thinking about the future and about making smart changes to the organization. A merger can also lead to more teaching opportunities, as well as educate your staff on new ways to serve clients, do administrative work and bring in more business. Overall, a well-executed merger can be seen as an investment back into your team.

Focus on the succession planning
Merging two similar not-for-profit organizations is a unique process. However, many of these deals can be a very personal decision due to the nature of this industry. The current climate is such that many are considering merging for succession planning reasons, and you can streamline this process by splitting it into several steps – including the succession plan side and the merger and acquisition side.

You have to analyze the market to determine if this transition is feasible to begin with. Unlike a for-profit merger, a not-for-profit organization’s deal is driven by the mission statement, not the price. But, you can gauge the market in a similar fashion. Look into the regulatory and corporate environment at this time. Analyze your donor base to determine if changes will occur following a merger, and if the new not-for-profit can withstand these shifts.

Conduct your M&A due diligence
It is easier to figure out if your proposed relationship won’t work before you say “I do.” Don’t get trapped in a merger with a not-for-profit that isn’t aligned with your mission and your culture.

You can determine whether or not your merger is the right move with due diligence. You must get into the details of your not-for-profit and your proposed partner at this time. Look for key elements, including:

  • Culture of both organizations – The makeup of the two not-for-profit groups in question is incredibly important during a merger. While you have likely looked at your mission statements already, make sure you also analyze culture. Can your staff work well with their team? Are you incompatible in any way? You can run into problems if your cultures clash, even if the finances make sense.
  • Financial covenants – Do you have any financial factors that will impede your merger? For example, you may have a loan on the books that prevents you from merging with another organization. Or, you may not have enough capital to perform due diligence at all. If this is the case, consider capacity building grants from community foundations that can offset costs of this process. More grants are being created today to help not-for-profit organizations achieve their mission goals. The idea is to provide the capital needed to bolster the existing management structure, and in some cases, you could qualify for additional funds as you move forward with your merger.

Work together as a team
Merging as a solution for a succession plan can be tricky at times. Instead of moving forward with a clear idea of what lies ahead, make sure you connect with the right advisors. Professionals can remove some of the risk involved in this process and offer strategies for due diligence, succession planning and the other aspects of your merger. That way, you’ll have the knowledge you need to complete a seamless transition.

Professional advisors’ early intervention can help with the due diligence process, and it could ensure that a deal doesn’t move forward if it isn’t right for those involved. Advisors can point out the benefits and risks of this type of deal, of which there can be many.

Once the decision has been made to merge, you have options at this stage. One organization can absorb the other not-for-profit group or you can create an entirely new organization. There won’t be immediate savings, and you must have a long-term vision. That is why you need to team with consultants that are in it for the long haul. At Clark Schaefer Hackett, we have the expertise to balance all elements of a not-for-profit merger and ensure you are getting the best consulting services during this time. We know what problems impact not-for-profit groups, and we can not only identify these issues but also offer suggestions for growth.

We will dedicate our strong not-for-profit team to your cause. Our experts will then gauge the current market, analyze your business and your merger and provide crucial advice so you can move forward with serving your mission.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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