[VIDEO] Come Together – The Road to Nonprofit Merger Success

Gregory Nielsen will discuss common scenarios that lend themselves to merger, identifying potential partners, and assessing collaborative possibilities.

Full Transcript:

Greg: Sounds good.

Steven: All right. Greg, I got one o’clock Eastern. Is it okay if I go ahead and get this party started?

Greg: Let’s do it.

Steven: All right. Awesome. Well, welcome, everybody. Good afternoon if you’re on the East Coast. Good morning if you’re on the West Coast. If you’re watching the recording, I hope you’re having a good day no matter where you are. We are here to talk about “Coming Together: The Road to Nonprofit Merger Success.” Nice topic. It’s our last webinar of 2020. We’re going to finish strong here. So thanks to all of you for hanging out with us for an hour. So we’re going to have some fun. I’m Steven. I’m over here at Bloomerang, and I’ll be moderating today’s a little discussion as always.

And just a couple of housekeeping items, just want to let you all know that we are recording, and we’ll be sending out the recording as well as the slides later on today. You should already have the slides, but if I missed you earlier, don’t worry. I’ll get all that good stuff in your hands. So, if you have to leave early or maybe get interrupted or a toddler barges into your home office, something like that, don’t worry. You’ll get the recording. You won’t miss a thing. But most importantly, feel free to ask questions along the way. We’ve got a Q&A box, a chat box. You can use either of those. We’ll save some time at the end for questions just as many as we can do before the hour is up. So don’t be shy. We’ve got an expert here, and we’d love to get to your burning questions. You can do that on Twitter. I’ll keep an eye on the Twitter feed as well. But we’d love to hear from you. Don’t be shy.

And if this is your first Bloomerang webinar, welcome, a special welcome to you first-timers. We do these webinars just about every Thursday. We love doing them. I was counting I think . . . I mentioned today is the last session. I think we’ve done over 60 sessions this year. There were a few weeks where we were doubling and even tripling up. So we love doing them. It’s one of our favorite things to do here at Bloomerang.

But if you’ve never heard of Bloomerang, if you’re wondering what the heck that is, we are primarily a provider of donor management software. Bloomerang is a donor database, a much highly reviewed one. I know I’m a little biased, but check it out if you are interested, if you maybe need a new system next year. Go to our website. You know, there’s all kinds of videos and stuff you can watch kind of get a sense of who we are. But don’t do that now because you all are in for a treat. We got a friend of the program returning, my buddy Greg joining us from Louisville. Greg, how’s it going? Are you doing okay?

Greg: It’s going great, Steven. I appreciate the opportunity.

Steven: Oh, I love it. It wouldn’t be the annual webinar series without you. I think maybe you finished this off last year if I remember correctly.

Greg: I may have. I know we’ve been working together and I’ve been presenting . . .

Steven: This is great. Yeah.

Greg: . . . for several years now. It’s great to be back.

Steven: We’ll have to make that tradition formal. We’ll do that because it’s always fun just to see and hear from me. Usually, I would have seen you in person, at least a couple of times.

Greg: I know.

Steven: But the way the year went. And, geez, what a great guy. Check him out. He’s got a great consultancy he was talking before. If you logged in early, he’s doing board retreats, strategic plans helping out his clients. And the biggest thing I like about Greg is something that I mention a lot about my guests that I look for is he’s done this. You know, he’s been a nonprofit CEO. He knows what it’s like. He knows what you’re all going through. So you’re going to see a lot of that and hear a lot of that experience come out. So give him a shout out. If you are near Louisville or in Kentucky, and if you need help with any of the things that he’s going to talk about, obviously, he’s an expert. So I hope you’ll connect with him afterwards. I think you’re going to want to when you get done here in the presentation. So speaking of the presentation, I’m going to pipe down. Greg, I’ll let you bring up your slides. I’ll stop sharing mine here because I know you’ve got some good stuff.

Greg: Sounds good.

Steven: Let’s see if we can get it going. There we go.

Greg: Okay. Hopefully, everybody can see that now. Steven, can you see it on your end?

Steven: Yeah. It looks good. All right. Take it away.

Greg: Okay. All right. Let’s do it. Okay. I want to thank everybody for coming out today to the webinar. Our topic is going to be the “Road to Merger Success for Nonprofit Organizations.” So this is obviously a topic that with all of the things going on in 2020 has been a huge topic, not only among nonprofit organizations, but also nonprofits and for-profits. So I want to give a general sense of our roadmap for the webinar today. So where are we heading? We’re going to talk about merger as part of a spectrum of possibilities. So, when we think about ways organizations can work together, merger is one that pops up all the time, but sometimes it’s one that nonprofits jump to when in reality there are a spectrum of possibilities of how organizations can collaborate with one another. We’ll touch on some of those possibilities.

We’ll talk about legal considerations and due diligence. So if you are pursuing a merger or sustained collaboration, what are some of those legal considerations to pay attention to? How can you make sure that you have a thoughtful due diligence process so that you evaluate your partners effectively? We’ll talk about the steps in the merger process. I’m going to give you a six-step process that I like to use when working with clients in the nonprofit space. And then finally, steps for assessing potential partners and negotiation of essential agreements. Let’s dive right in.

I do want to mention, as Steven said, I’ve been a nonprofit executive. I served as a nonprofit CEO of two different organizations just over a decade period of time. And I understand right now that the nonprofit landscape is rocky. You all are living through what is perhaps one of the most challenging years ever for nonprofit organizations. There is a lot of uncertainty. There is a lot of strain. There’s a lot of stress. And for many of you, demand for your services has never been higher. So I want to recognize that at the outset and particularly how it dovetails with some of our conversations around merger. So there are a lot of different motivations, a lot of different reasons why organizations may pursue collaborations with other organizations. Part of those reasons may be just a crisis. It may be a financial crisis, it may be overwhelming demand, or it may be a desire to expand what you’re doing to different geographic markets or different aspects of the community that you may not be able to reach right now.

A couple of impact by the numbers. So when we think about merger, why is this becoming such a prominent conversation? Why am I hearing more requests for information about merger this year than in any prior year? Some statistics that come from a study that was done by LaPiana & Associates back in April 2020. 91% of nonprofits surveyed had curtailed or adapted their services in response to COVID. 18% of staff on average furloughed or laid off. 90% of organizations experiencing revenue loss. 44% anticipating further staff cuts, and 55% anticipating further service cuts.

So when we think about this merger conversation, why is it creeping into our board rooms? Why is it creeping into our staff rooms? Why is it showing up more in our strategic plans? You see some of the numbers there. We have a nonprofit sector right now that is stretched, that is strained in some cases to the breaking point, and that’s driving some of these conversations. Not all, certainly not all, but several of these conversations being driven by the impact of COVID and other aspects.

When we talk about sustained collaboration, you’re going to hear me use that phrase several times throughout the webinar today. A sustained collaboration when I use that term is a strategy to achieve a mission or an objective, not an end in itself. So if you think about your most recent strategic planning process, right? When we think about sustained collaboration, that’s a strategy, right? We’re not going to create an objective to have a sustained collaboration with another organization. That’s not an end in itself. The end is we want to, for example, expand our service area by 20%. And sustained collaboration may be a strategy to achieve that end. The end may be to become more financially sustainable as an organization. Sustained collaboration could be a strategy to achieve that end. So I encourage you to think about collaboration, not as an end, but as a strategy itself to move you closer to an objective for your organization. So as I use that term sustained collaboration, that’s what I mean as we go through today.

A quick note. If you do have any questions as we go through the presentation today, I encourage you to add those to the chat box. We are monitoring the chat box, and I will leave time at the end to address as many questions as we can get to.

So I talked about how merger was part of a spectrum of options, a spectrum of possibilities. I break those spectrum of possibilities into three different buckets. There’s the first bucket, and this as you go from left to right on your screen, goes from the informal to the more formal, right? So we think of the first bucket as collaborations, we think of the second bucket as alliances, and the third bucket as items that require a more integrated organization. So let’s start on the left side. When we talk about collaboration, we’re talking about things like a coalition, things like a movement, things like a collective impact. So items that are not necessarily resulting in a change in the business structure for your organization, they just may be a partnership with another organization, less formal, not requiring a change to your bylaws, to your articles, to your business structure, but just a way of working together with a partner. Again, something like joint advocacy falls in that category as well.

So if I’m an organization that is working for environmental justice, and I know that individually, my voice only has so much impact when it comes to advocacy, I may choose to partner with another organization of a similar mission type in a similar area to multiply or amplify our voice when it comes to advocacy. That’s a more informal partnership. It’s more of what I call a collaboration. You take a step to the right on the spectrum of possibilities, and we go to alliances. That’s when we think of things like shared space. So two nonprofits coming together to share office space, which we see increasingly particularly in a time of COVID when organizations are reevaluating their space needs. Fiscal sponsorship is a contractual agreement between two organizations. That’s an alliance. Joint programming and sharing admin support. So we’re not changing necessarily the business structure of any of the organizations, but we are thinking about more formal ways of working together. So a lot of times, these are contractual agreements, contractual relationships between organizations.

Finally, as we move to the far right, we are at the more formal end of the spectrum where we think about integrated organizations, joint ventures, parent-subsidiary relationships, asset transfers. So as an organization, I may transfer the assets of my organization to a partner. It’s a type of merger. And again, finally, at the bottom there you see merger. So integrated organizations are resulting in a change of our business structure. We’re filing new paperwork. We’re entering into a new agreement for a new day for our organization. We’re going to look and feel very different as an organization as a result of that change at the far end of the spectrum. So, again, a lot of times when I talk to nonprofit organizations and they say, “You know what? We’re considering a merger,” the first part of the conversation is are we sure that that’s the right approach for your organization. Let’s talk about the spectrum of possibilities. And at the end of the day, merger may indeed be the right possibility for you to pursue, but let’s also talk about the other options so that we make sure we cover the landscape.

A couple of common merger structures. There’s what’s called a statutory merger. So when we think about a statutory merger, that is the traditional merger where both organizations are dissolving and forming a new entity. So we’re in the United States. We’re forming a new entity. We’re applying for a new charitable organization status. Transfer of assets is where there is a dissolving organization and a surviving organization. So in a transfer of assets, one organization is taking its assets, transferring it to a partner, and then dissolving. There’s a surviving organization and a dissolving organization and a transfer of assets. Other options that are a little bit more complex than what we’re going to cover today are a liquidation transfer of assets, a consolidation, and parent-subsidiary relationships. We can touch on those in the Q&A if you have specific questions. But generally speaking, we’re going to be talking mostly about statutory merger and transfer of assets today.

A couple of common typical characteristics for merger. So when we think about mergers in the nonprofit space, far more common is the what I talked about a minute ago, which is there’s a surviving organization and a disappearing organization. So we’re still going to call it a merger, we’re still going to consider it a merger, but instead of having to apply for a whole new 501c3 status, instead of having to create a whole new organization, we’re simply going to designate one of the merger partners as the surviving organization and one of the merger partners as the disappearing organization. And for the disappearing organization, the surviving organization will inherit all of the assets, liabilities, and obligations of that disappearing organization. It is going to be the product of negotiation, and due diligence is obviously vital. So anytime we’re talking about transferring assets, we’re talking about liabilities going with those assets, obviously due diligence, and making sure that both parties have a really clear picture of what they’re stepping into of what obligations and liabilities may exist. That due diligence is going to be vital.

A couple of common nonprofit merger scenarios. So I talked about one at the outset. Perhaps there’s a financial crisis. Maybe COVID-19 has brought on a financial crisis for an organization. That’s not the only common scenario that we see in nonprofit mergers. Another common one is organizations in competition. So if you think of your own community, and you think of the mission of your organization, there may be other nonprofits that are competing with you for staff members, that are competing with you for donor dollars, grant dollars. Oftentimes, organizations in competition with one another will come together and say, “Are we stronger together than we are separately? Can we achieve some efficiencies? Can we achieve greater results and impact in our mission area if we come together in some formal way?”

Other common merger scenarios include the departure of a key leader. So one of the most frequent scenarios that leads to an organization reaching out to someone like me to explore merger is perhaps they’ve had a long-term executive director. They may have a founder of the organization, and that person leaves after a significant number of years. That’s an event, that’s an opportunity that often causes boards to look and say, “What is our future as an organization? Are we going to go out and hire a new leader for the organization, or is this an opportunity for us to explore a different business structure, a different way to achieve our mission in the future?”

Oftentimes it’s also a growth strategy for nonprofit organizations even during COVID-19. I was telling Steven right before we jumped on the webinar today that some organizations are looking at merger in 2020, 2021 as a growth strategy, meaning they are financially viable, they are financially sustainable, perhaps haven’t been hit as hard by COVID-19, but sense an opportunity to expand their footprint, expand their impact, and help out organizations that may be struggling or maybe in financial crisis. So opportunity presenting itself.

Combining affiliates. We’ve seen a lot of combining affiliates in 2020. That’s been a trend that has led to mergers. So if you think about, for example, YMCA. In a state a YMCA may have 10, 15, 20 different affiliates operating within that state. Some of those affiliates as what we’ve seen as a common scenario are coming together and saying, “Let’s work together more closely. Let’s think about a merger,” so that there has been some consolidation along with some affiliates and national organizations. Organizations struggling to recruit and retain board and staff. Another common merger scenario. And then finally, and one to be cautious of is funder suggestion. We hear from a lot of funders in the nonprofit space that your nonprofit perhaps should explore consolidation, should explore collaboration or partnership with another organization. I’ll talk about some of the red flags associated with that but some common merger scenarios.

Understanding your ecosystem is a necessary and a critical first step to exploring a sustained collaboration with another organization. Clearest example we have of that is the healthcare landscape, right? Since the Affordable Care Act was passed, I believe it was 2010, fundamentally changed the healthcare landscape. What have we seen? We’ve seen a lot of mergers, a lot of consolidations even in the nonprofit space when it comes to healthcare. What happened? Nonprofit organizations understood their landscape. They understood that the ACA was going to fundamentally change the landscape of healthcare and that there was an opportunity for them to partner with and explore relationships with organizations in this new landscape to get ahead of the curve to be ahead of the change that was coming. So again, depending on the individual mission that you have, understanding your ecosystem, understanding your landscape. When do those unique doors or unique windows of opportunity open that present opportunities for your organization to fundamentally rethink and reimagine who you are, how you’re accomplishing your mission?

A couple of common benefits sought. So when we think about organizations that are exploring merger, why are they doing so? What are some of the common benefits they’re seeking to achieve? The first is program preservation. If I am a nonprofit particularly during a time of financial crisis, and I’m worried about having to potentially close my doors, merger is an alternative or an option to preserve my program. I may not be able to carry out that program under my umbrella, but if I transfer that program itself to a partner to another organization, that could be a way to preserve a program that I believe strongly in.

Heightened impact. We want to expand. Reduced administrative costs, stronger strategic positioning for the organization, stronger board and staff. So back to what we saw earlier with a common merger scenario. If my organization is struggling to recruit and retain board and staff members, if we were to consolidate with a partner, if we were to merge with a partner, does that result in a stronger board overall? Does that result in a stronger staff overall? So again, common benefits that organizations are seeking through a merger.

Conditions for success. The Bridgespan Group. So those of you who are familiar with the Bridgespan Group. They studied nonprofit mergers in several U.S. states over an 11-year period. What they found is organizations likely to benefit from merger where most often those that number one compete with other nonprofits to offer similar services. Back to what we said earlier, common merger scenario, two organizations competing deciding, “You know what? We’re stronger together than we are apart.” So number one, organizations that compete with other nonprofits to offer similar services in the same community.

Number two, organizations that are asset intensive. So if my organization is dependent on skilled employees and the ownership of large facilities, which can often be costly, such as schools, such as healthcare facilities, right? Again, another condition for success. If we’re asset-intensive, occasionally, we will be able to achieve greater efficiencies by partnering together with another organization.

And then third, organizations that are bound by regulations that dictate how services are reimbursed, how staff members are certified, and facilities are licensed. So again, conditions for success. Organizations most likely to benefit from nonprofit merger. Certainly not an exhaustive list.

This is often one of my most popular slides. So when I’m talking with board members, when I’m talking with foundations, so I’ve presented this presentation, this webinar to community foundations and other philanthropic foundations, I talk a lot about merger myths because there are a lot of myths out there when it comes to mergers in the nonprofit space, and I want to address those head-on.

The first myth is that mergers save money particularly in the short-term. There’s a very common misunderstanding out there that if I take organization A and I take organization B, and I put those two organizations together in a merger, we have instantaneously cut costs, achieved deficiencies, and on day one, we will save money, right? That’s just not the way it plays out in reality. That’s not the way it exists. Often there are costs associated with the merger itself. The merger is resulting in a larger organization that is going to require greater infrastructure, greater investment in different aspects of the organization. So common myth is that in the short to medium term, mergers save money. In fact, often mergers will cost money. Not to say we shouldn’t do it, not to say that there aren’t other benefits that outweigh those costs, but exploring a merger just as a cost-saving mechanism is often a flawed strategy.

Second common merger myth is that there are too many nonprofits. I hear this often from funders, I hear this often from foundations, “You know what? They’re just too many nonprofits in our community.” In reality, what we know is that there aren’t too many nonprofits. What we need to do is engage in greater ways of identifying collaboration, funding specific collaborations that are effective, and giving organizations the room to explore those relationships, right? So instead of jumping straight to merger and saying, “That’s a solution for duplication of services, that’s a solution for replication in the community,” what we want to do is give nonprofits the funding and the room to explore how they can most effectively collaborate with a partner. Merger may be the solution, but as we said at the beginning when we talked about the spectrum of possibilities, it’s just one option, right?

The third merger myth, and I hear this all the time, is the merger of equals. Just about every merger conversation I’ve facilitated has initially presented to me as, “Organization A is a strong organization, organization B is equally strong, and we’re considering a merger,” right? Oftentimes that’s a fallacy, right? Inevitably, one organization is going to be stronger than another organization. One organization has strengths in its fundraising streams, another in its program delivery. There are going to be different strengths, different weaknesses. Ideally, they complement one another, right? So when we think about a merger of equals, that’s not often the way it plays out in reality. Often there is a stronger organization. There is a weaker organization. There are organizations that have different strengths and weaknesses.

Next is the all-encompassing merger agreement. I see a number of nonprofit organizations stall out in the merger process because they try to negotiate every single aspect of the merger in the agreement itself when in reality, we can never take a fully comprehensive look at everything we need to understand before executing the agreement itself. In reality, there are always going to be things that we learn about each other that we have to continue to navigate just like we do in strategic planning after the document is published, after the document is signed.

The final merger myth is that the whole is greater than the sum of its parts. Oftentimes when we talk to nonprofit organizations, they will expect that on day one of the merger, on day one of the two organizations having merged and come together that that merged organization will be stronger than each of the individuals were. In reality, we’re creating a new organization. However we do it, it results in a new organization that is going to take time to develop. It’s in its infancy. These are teams that are going to need to build trust between one another. They’re going to need to determine how we work together, how we lead and govern the organization, how we make decisions. So in reality, while the merged organization overtime may be stronger than the individual parts, in day one, it is still an infant organization that is still going to need time, money, and resources to develop and get its legs underneath it.

There are also costs associated with merger, right? The first is an opportunity cost. So as you think about this with your board, as you talk about this with your board, and if you’re choosing to pursue a merger, the first thing to be aware of is that there’s going to be an opportunity cost, meaning that as an organization, as a board, it is going to take a lot of time and bandwidth and capacity from your board and leadership team to go down this merger process. And the question you have to ask yourself is, “What are we going to have to pass up? What is going to be the opportunity cost of things that we’re not going to be able to do because we’re going to devote our time, our bandwidth, and our resources to pursuing this possibility of merger?” Again, it still may be the right decision for you, it may be something that you want to invest that time and resources in, but you need to at least have the conversation as an organization of what’s going to be the opportunity cost of going down this road.

Second, “What are going to be our infrastructure needs? So what are we going to need?” A key tip for organizations approaching a merger is to budget for the merger process itself. What are going to be the infrastructure needs that we have as an organization that’s going to set us up for success in the conversations themselves?

And then the third common overlooked merger cost is heightened salary. So I’ll leave it just at the executive director, at the CEO level, right? If I am the CEO of a nonprofit organization that has $500,000 budget, my salary level may be here, right? If all of a sudden we go down a merger path, and I’m now the CEO of an organization with a $2 million budget, my salary expectations are going to change with respect to the type of organization I’m leading, right? We often overlook that and think that just by consolidating staffs, we’re going to save on salary. In reality, salary structures may change because the merged organization is a different level, a different type of organization than what each of the individual component parts were.

There also may be additional positions that we have to create within the merged organization that are going to result in the investment of salary. So while neither organization individually may have required a CFO, when we merge the two and we see what the budgetary needs are and the type of services we’re providing, different positions that may not have been necessary for the individual organizations will now be necessary within the merged organization. So again, none of these are showstoppers, but they are costs that I would want your board and staff to take into account as you consider the merger process.

A quick did you know. So did you know according to “Harvard Business Review,” 70% of corporate mergers fail due to some combination of culture, ambition, and strategy getting misaligned? So when I talk to nonprofit boards who are exploring a merger, right, oftentimes they want to jump to the merger agreement itself. They want to jump to the legal formalities, “What paperwork do we need to fill out? What is this going to require of our articles of incorporation, our bylaws?” In reality, what we know is that nonprofit mergers that are most successful are the ones that devote the majority of their time to issues of culture, ambition, and strategy, and how do we align those between them partners, right, between the two organizations or more organizations that are seeking to come together.

My recommendation is to devote the majority of time to issues of culture, issues of strategy, and how do we get to a point of alignment. The paperwork will figure itself out. We can retain experts for that. That’s often not going to be what derails the merger. What is oftentimes going to derail the merger is if we have different cultures between the organizations that are not accounted for, different strategies between the organizations that are not aligned.

It’s important during any merger process to identify and maintain what I call lanes of success, meaning, if I’m a board member, I need to be crystal clear about what is my role in these merger negotiations. We know that 95% of successful nonprofit mergers are driven by the CEOs working together of the partners, right? If the CEO is not on board, if the executive director is not excited about this prospect, that is going to be a significant risk factor that we want to be aware of that could significantly derail the merger process.

And then finally, the funders. It’s going to take budget. It’s going to take resources. We’re going to want to have communication with our funders for any merger to be successful, but understanding what is the lane of success for a funder. It may be providing resources, it may be serving as an advisor through the process, but what we don’t want is the process to be driven solely by a funder. So we don’t want partners to come together solely because there is funding on the table if they can somehow figure out how to work together, right?

A more thoughtful approach both from funders and from nonprofits requesting funding from philanthropic foundations is to think about what is the appropriate lane for the funder, providing resources, providing space, providing capacity for organizations to explore a range of options, knowing at the end of the day, they may choose to come together, they may choose to remain separate and apart.

There are six steps that I suggest to you are part of a successful merger process. There’s the opening of the door, there’s the digging around phase, you can call that due diligence, negotiating the agreement, obtaining legal recognition, what I call go time, and then integration and evaluation. Let’s talk about each of those steps in the process briefly.

The first is opening the door. What we know about mergers is that most often, they are the result of CEO to CEO coming together for an informal conversation. What I recommend is to think about merger as the last thing you’re talking about in that initial conversation. None of us would go and have an initial date with someone else in a coffee shop and at the end of that conversation say, “Let’s get married,” right? Instead, the question when we’re opening the door is, “Let’s get together for a cup of coffee, let’s get together for a conversation, and talk about how might our organizations work more closely together.” Keep in mind those spectrum of possibilities. Put those out there. Share that document with your partner, right? And say, “You know what? There’s a range of ways we can operate more closely together. Let’s think through thoughtfully what that might look like for our organization.”

At that opening the door phase, I encourage leaders to pay attention to past collaborative experiences. Talk with your partner, talk as organizations, “What has been our experience with collaboration in the past? What’s gone well? What hasn’t gone well? Have we had any nightmare situations that we want to be aware of? Are there any battle scars in each of the organizations that we’re going to want to be aware of? What is the status of the board-CEO relationship?” A merger is going to require a close relationship, close communication between both sets of boards and CEOs, right? If there are dysfunctions or if there is some fraying in one of the board-CEO relationships, pay attention to that. That’s an aspect that could easily derail the merger process.

How successfully are each organization able to speak with one voice? So when I talk about one voice, it’s there are a lot of stakeholders in a nonprofit organization, and that’s multiplied during a merger conversation. There are boards. There are staffs. There’s the executive director, senior leadership team. How closely or how much can I count on the partner organization to speak with one voice? Meaning, if I’m having a conversation CEO to CEO, can I trust that that CEO is representing the will of the entire organization, right? Can I rely on that being the official position of the organization?

What is the current condition of each party? Be honest in the opening the door phase. If your organization is facing financial crisis, don’t open the door to a partner by presenting yourself as being in a phenomenal financial position or in a solid sustainable financial position and vice versa, right? Honesty is critically important at all stages of the process. Talk with your partner at that opening the door phase about your risk tolerance. Mergers often are going to derail prior to getting to the finish line. What is your organization’s respective risk tolerance going through this process?

And then finally, what is your timeline? Making sure at the outset of any conversations that we have a common understanding of a timeline. So if my organization is in financial crisis, and I know that I have three months cash on hand, right, and I’m sitting down with another organization that’s approaching this because it might be a good strategy for them in the next 12 to 18 months, we have a mismatch there. We have a misalignment. Let’s address that at the opening phase. Let’s address that, and so we can talk about whether there is room to move on to phase two, to step two.

When we think about identifying partners. So some organizations will approach me and say, “I don’t even know where to start. Where would I look for a potential merger partner or a potential collaborative partner?” Think about organizations that you’ve worked with in the past successfully, that you work with presently successfully. Who has common values? Who has a common mission to what you do? Who offers complementary programs and services in the community? Who might be geographically desirable?

So if my organization provides services in the Northeast, for example, in the United States, and we’ve always wanted to be able to get further south, we’ve wanted to tap into the Southeast, who’s doing what we do or something similar to what we do in that geographic region?

And then a final note is that successful mergers, and this is based on years of experience, successful mergers move at the speed of trust, meaning, we can go through these steps, steps are important, but it’s important to make sure that we’re building trust between the partners at every step of the process because that’s going to determine how slow or how fast we move through this process.

Second step in the process is digging around. You can call this due diligence. Many organizations at this phase will choose to form a merger committee, meaning, we’ve decided it may not be efficient for us as a whole board to go through this merger investigation. We’re going to deputize a group of people or a subset, a task force, an ad hoc group on the board and senior leadership of the organization who are going to form our merger committee.

Oftentimes, at this stage, two organizations will enter into a confidentiality agreement, meaning, we’re going to talk more specifically about how we might partner together with another organization. We want to execute some type of non-disclosure or confidentiality agreement that says that anything we learn about each other during this process is going to be held confidential. That’s a way of building trust. It’s a way of as an organization I now feel more comfortable sharing documents, sharing financial information, sharing thoughts and ideas with you as a partner, knowing that we’ve both agreed to keep those confidential. What types of information are we each going to agree to exchange? And then oftentimes at the end of the due diligence phase, there will be what’s called an intent to merge resolution.

So, again, the merger committee may come back to the full board and say, “We’ve gone through this due diligence phase. We’ve learned a lot about our potential partner. We think that this is a good idea for us to enter into. We think that negotiations would be productive.” Each organization may pass an intent to merge resolution. That’s often the result of phase two when it’s successfully done. Oftentimes organizations will decide, “You know what? We’ve learned a lot about each other. We’re going to go our separate ways. This doesn’t make sense.” In that case, there wouldn’t be a resolution.

I do tell organizations because there is no good or bad answer. So when we form the merger committee, their goal is not to find a way to merge these two organizations. Their goal is to undertake an honest exploration of whether a collaboration of some sort including merger makes sense for the organization. And even if they come back to the board and say, “You know what? We’ve engaged in this due diligence process and either this is not the right partner for us. This is not the right time for us to do this,” there is value in that exploration itself. It is increased organizational self-awareness. That merger committee has learned an awful lot about the landscape both of their own organization and of the potential partner. It has unearthed other partnership opportunities. So maybe merger wasn’t the right way for us to work together, but maybe a coalition or a movement or joint advocacy is. It’s also built team growth. That committee will grow closer as a team as they go down that collaborative process.

Common due diligence items when we think about merger, right? Governance and values. We’re looking at our values, you know, for each organization. How well do those align? Licenses and accreditation. Do we have similar licenses that we need to maintain if any? What are the tax implications of our organizations coming together if any? Are there any real physical or intellectual property considerations that we need to be aware of if we were to merge these organizations? How do the financials look? Are there any contracts that we need to be aware of? So are there any contracts that would be materially affected if we change the nature of our organization, human resources and risk? So are there any liabilities out there on the HR side? How does each organization handle their human resources? These are the common areas of due diligence that the merger committee is going to want to look into.

I tell merger committees, there are five key questions that you’re trying to answer. The first is will the merger result in better quality, greater efficiency, or more comprehensive service? So again, thinking back to those common reasons for the merger. Why would we be doing this? Does this merger after looking through all of these documents, after having these conversations, would a potential merger result in better quality, greater efficiency, or more comprehensive service?

Number two, how do these two organizations complement one another? So if you’re thinking about a report from the merger committee back to the board, organizing it under these questions is a helpful framework, a helpful rubric to use.

Number three, how are the philosophies and cultures of the organization similar or different? Will the merged organization be more sustainable? And what does the cost structure look like for a merger, both short and long-term, remembering that mergers cost money, mergers cost resources?

I encourage committees to pay attention to both the visible and the invisible during their due diligence process. It’s often easy for the committee to stay on the left side of the screen with what they can see, systems, technology, policies and procedures, programs, resources. That’s easier for committees to evaluate. Far more important is for committees to pay attention to what they can’t see, feel, and touch.

What are the leadership styles of both organizations? How do they go about making decisions? Are there processes for reaching decisions, similar or different? How do they approach diversity equity and inclusion among each organization? How much trust is built up between the partners? What are the values of each organization? And how does each organization resolve, embrace, or shy away from conflict? What is their conflict appetite? What are their conflict resolution, processes, and procedures?

I mentioned that if the committee does recommend moving forward, often there’s an intent to merge resolution. What we see as common terms of the intent to merge resolution is a promise of good faith. Meaning, “We’re going to enter into negotiations now of how we can work closely together. We’re going to do so with a promise of good faith between the organizations.” What is our ability to inform our stakeholders? We want organizations in that intent to merge resolution to come to an understanding of what are going to be the common messages and themes as they share this intent to merge with the public . . . with their stakeholders so that there’s a consistency in messaging.

Exclusivity in discussions. Meaning, if organization A is talking to organization B with an intent to merge, that that’s the only organization we’re talking to, right? I’m not also out there talking to organization C about merging.

Understanding that merger fundraising is a group effort. So we’ve identified what are the costs going to be moving forward, knowing that those costs are going to have to be shared between the two organizations. And then finally, a delegation of authority to enter into the negotiations to the merger committee itself.

Key tip as I mentioned is to budget for the merger process. A lot of organizations make the mistake of not budgeting at all for the merger process. And what we have then is a really short-circuited due diligence process. There are no resources available to help facilitate the discussions, help move the organization down that path. What are we going to do if we get to the place where we need to file legal paperwork? If we have no budget appropriated to that, are we going to ask for pro bono support? And how likely are we going to be to be able to achieve that?

Step three is negotiating the agreement. Within the agreement itself, I talked about shying away from the all-encompassing agreement. In reality, what we want to see in the agreement are the following. What is the timeline for the merger? So we expect this merger to take place over a 12 to 18-month process or a specific date in there but organizations coming to an understanding of what is that timeline.

What will be the mission and vision of the new merged organization? Are we going to adopt the mission and vision of one of the two partners, or are we going to create a new organization with a new mission and a new vision?

How are we going to comprise the board of directors? Is it going to be so many seats from organization A and so many seats from organization B or some other collaboration? Who’s going to be the CEO of the merged organization? We have multiple partners who are coming together who each have their own chief executive. How are we going to navigate that? That should be spelled out in the agreement too.

What will be the budget of the merged organization? What will be its name and principal location, corporate structure, and then the programs that we anticipate being able to offer to the public as we merge the organizations, right? So just some common terms. Again, we’re not trying to account for everything in the merger agreement, but we do want to make sure we hit those highlights, that we come to an agreement, come to a common understanding of those highlights.

At that point after the agreement has been reached, the next step in the process is legal review. That’s where I recommend that your organization reach out to an attorney that you’ve worked with in the past or one that is especially familiar with nonprofit organizations, nonprofit law and merger. Common issues to review is, is the agreement itself sufficient? Has the agreement covered the main legal basis that we need to cover? Second, are there any collective bargaining implications of the merger? Do either organization have any employment contracts or other collective bargaining agreements that we need to be aware of and account for in the agreement? Does the merged organization represent any anti-trust concerns, right? That’s an issue for legal review. And then finally, have we adequately addressed property concerns in a way that is going to minimize any liability for either of the partners and for the merged organization?

Ratification process goes forward. The merger committee makes a recommendation to the board. The proposed agreement is presented. The merger committee at that point disbands, the board’s vote and assuming they vote favorably. The step that we have there is most easily referred to as we now have an agreement in principle between the two parties, right? Nothing legally has been executed yet. All the board has done is vote to accept and approve the agreement, the merger agreement. That’s most easily associated with having an agreement in principle.

The next step we need to go to is legal recognition. So what we want to do at that point is we will be working with an attorney to prepare the documents in accordance with your individual state law to make sure that the merger documents, the legal documents, whether it’s revised by laws, new articles of incorporation, are done in accordance with your individual state law, again, paying attention to whether we have a technical merger, meaning a whole new entity is being formed and applying to the IRS or a statutory merger where one organization is disappearing and essentially dissolving into the survivor organization.

Step five is go time. It’s time to execute on the plan. All of those plans that we’ve been making to merge the organizations along the way, step five is when we’re going to put those into practice. Organizations need to intentionally determine, “What is going to be the publicity level of the merger itself? Is this something we want to shout from the rooftops, we want to bring in the media, we want to promote on our social media, or is this something, a merger that we want to be a little bit more low-key for various strategic reasons?” That’s a key decision for an organization to make as they go into the execution phase.

Step six is integration and evaluation. I recommend organizations form an integration committee, an integration team that has representatives of both merging organizations on it. They can be a single point of contact as any issues arise during the integration of the organization. Common integration areas are infrastructure and technology, emerging two technology systems, staff processes, policies and procedures, culture and habits, which is critically important, and then any board dynamics. We’re putting together two new teams, right? So we want to honor the best of what each of those teams is bringing to the table but also recognize that we’re forming something new together as a team. Key areas of integration are the board, management structure, finance, programs, staff, HR, fundraising, communication, technology, and our facilities.

I mentioned organizational culture. I told you back from in that “Harvard Business Review” slide most mergers that fail do so because of misalignment of values, culture, and strategy, right? So when we think about putting organizational cultures together, we want to celebrate the old and create new together. Consistently communicate what are going to be the values of this new organization. Discuss the traditions of each organization that we want to bring forward into the new organization. Define success together and establish that.

My encouragement to organizations is don’t ignore the elephants in the room. So any time we are integrating two organizations, there are always going to be hiccups. There are always going to be elephants that pop up. My encouragement is don’t ignore those. Don’t allow those to mushroom up to something that could derail the whole integration. Establish a process and a procedure to identify when those hiccups happen and to work through them together. What is that process going to look like?

And then finally, form what I call your EIs, and that’s your effectiveness indicators. So moving forward through the merger through that initial 6 to 12 to 18 month period, what are our key effectiveness indicators? How are we going to know that this merger is achieving the goals that we thought we would, right?

In summary, some things I want you to take away from this webinar . . . I hope you take away from the webinar, is that sustained collaboration represents a spectrum of possibilities. We’ve talked about merger but knowing that there are a lot of collaborative possibilities for organizations. Understanding the ecosystem of both organizations, avoiding the merger myth traps that we talked about. Remember the six-step merger process, the differentiator, meaning successful mergers pay specific intention to organizational culture, and then finally, know your EIs.

So in summary before we take questions, I want to thank Steven and the whole Bloomerang team. I think so highly of their organization and the service that they provide for nonprofit organizations. Encourage you if you have further questions to reach out to me directly. My contact information is in the slides itself. You see it on the slide in front of you right now. And I encourage you to reach out. So please don’t be a stranger, and if you have additional questions that we don’t cover on the webinar today, I encourage you to reach out. With that, Steven, I’m going to turn it back over to you.

Steven: Wow, that was a lot of good stuff, Greg. That was awesome. I was just sitting here listening like, “Wow, this is great. This is like the best premise I’ve heard.” Leave your contact information up there, Greg, just while we’re doing questions because I want people to be able to reach out. But, yeah, we probably got about maybe seven or eight minutes, and there’s some good ones in here. I really liked what you said, Greg, about, you know, this myth that there’s too many nonprofits. I feel like I see that around a lot, and, you know, there’s a lot of need out there.

And we were talking earlier . . . one question I see a lot was, I’m just kind of perusing Facebook groups, is, you know, there’s a new nonprofit founder or someone who wants to start a nonprofit. I see a lot of people respond to that person saying, “Don’t do that. You should merge with another org instead.” And I kind of get where they’re coming from, but I also wonder if maybe that’s a little bit discouraging to that founder. What do you think about that? Do you think that’s good advice, or does it depend? I know I’m kind of putting you on a spot with kind of tough question.

Greg: I often think that that’s not helpful advice because you have someone who’s voicing that who has a specific idea, who has a specific passion for making an impact in the community. And I think the question is not should you merge that idea with an existing organization. What we’re really looking for is not a set number of nonprofits in each community. There’s nothing magical about having 1,000 nonprofits instead of 1,500. What we want is an integrated community where folks know what else is happening, what other resources are there, and that there’s an ongoing line of communication and dialogue. Sometimes that may result in merger. Sometimes it’s simply a partnership or a collaboration on a specific project. But I don’t think we want to be prescriptive about how organizations have to work together. I think leaving those discussions for nonprofit leaders is probably the most valuable way to address unmet need in communities.

Steven: That makes sense to me. I love it. I need to have a good answer to that. A couple questions in here. Here’s an interesting one from Lauren. What’s your advice when maybe nonprofits are scared off by a merger discussion, maybe they think like, “Whoa, you know, what do you mean? We’re doing fine,” or maybe it’s the other way around, they don’t want to approach an organization? You know, want to be collaborative, but I think sometimes people are a little standoffish, maybe a little . . . they view it as competition perhaps. What advice would you have for kind of getting over that fear?

Greg: I think that’s a legitimate fear, and it certainly is among boards is that merger can be a scary word, right? You know, it’s a legal term. It sounds like it’s a lot of work, and it is. But really I think for boards to approach it, “How can we more thoughtfully collaborate with others in the community?” I think that’s the essential question. And if you wanted to position the discussion or start the discussion with a board, I think that’s the first way to do it. We have a mission. We know what our impact is. How could we expand that impact? How could we work more collaboratively with others? I think that that leads itself to an exploration where you get to know your own organization and partner organizations better, and if merger is the result of that, that’s great. And that’s the strategy, but it’s not necessarily driving it. I think if we put the cart before the horse and use that merger term up front in conversation one, we’re kind of driving to a specific outcome that may or may not be the best for our organization.

Steven: Makes sense. Greg, more than a few people have asked about the concept of maybe a parent subsidiary or parent subordinate type relationship. When and where does that make sense as opposed to, you know, a more traditional merger or another way of doing things? Is that something you’ve seen work in certain situations more than others?

Greg: I have seen it work. Most often we see that where there is a significant disparity between the two organizations, either in size and scope, budget, board strength. There’s a very different power dynamic between the two organizations where one would clearly slot into the parent role, and one would clearly slot into the subsidiary role. Oftentimes, if we have organizations of relatively similar strength and similar size and scope, it can be a little bit trickier to enter into some of those parent-subsidiary negotiations. So I think if you’re talking to partners where size and scope is different, budget is different, board strength, staff strength is different, I think that those are what lend themselves to some of those parent-subsidiary relationships, or you have organizations that are simply ready to walk away from some of those obligations that they have of leading an independent 501c3 organization. Fiscal sponsorship is one way to do that. Parent subsidiary may be another.

Steven: Fiscal sponsorship. Yeah. I thought that would come up. That makes sense. Speaking of walking away, a question just came in from someone that it sounds like they kind of got far along in discussions with merging with someone else, but for whatever reason, the other party got busy. Maybe they’re getting cold feet. It seems to have grinded to a little bit of a halt. What should folks do in those situations to maybe push it over the finish line or stop and re-evaluate? What advice for that person?

Greg: That happens commonly, right? I mean, nonprofit organizations are flooded with different demands on their time. It’s one of the reasons why I highlight timeline so much. And I encourage organizations at every step of the process in every conversation they’re having with their potential partner, revisit that timeline. Let’s make sure we are still aligned, and if there have been changes in the timeline for one of the organizations, we identify that as quickly as possible so that we can either amend the overall timeline, or we know that one party is just going to have to walk away because we just fundamentally need to have this resolved at a different point in time. So I think keeping those conversations of timeline alive in every conversation a part of every agenda meeting is one way to avoid that feeling like we’re dragging because what we don’t want to do is drag our partner over to the finish line.

Steven: Yeah. That makes sense.

Greg: It doesn’t feel good for either organization.

Steven: It always comes back to the planning element, doesn’t it? It’s all [inaudible 00:56:21]

Greg: It does. Yes. And it’s not easy, right?

Steven: Yeah.

Greg: I give this webinar, and it sounds like it’s boom, boom, boom, step, step, step. I’ve been in these conversations. I know how difficult these discussions are and how many different ways they can get derailed.

Steven: It’s hard. Speaking of, you know, getting it started, whose job is it? A lot of people have been asking is it the board, the CEO? Is it, you know, middle employees, junior employees? Who do you think should really kind of take the lead?

Greg: Internally, within an organization, I think it is perfectly fine for the board to suggest it to the CEO, the CEO to suggest it to the board, senior leaders within the organization to bring it up to the CEO, CFO. I think all of that is fine on an internal basis. I’m a big fan and a little biased personally. I think the initial outreach to an external partner needs to go CEO to CEO. I think that’s the most likely to set the process up for success. It’s a little bit more awkward when it’s board member to board member from another organization unless there is such a particularly strong relationship there that, you know, there’s a lot of trust built up. What we know especially highlighted by that data, that 95% of successful mergers are driven by the CEOs of the various organizations. That’s where I like to see the process start.

Steven: What about when maybe a founder or an ED is exiting the organization? Have you ever seen that be a catalyst for this process? We had somebody asking a question that . . . it seems like something is pending in their organization.

Greg: Very common. So for an organization, it’s a pivotal part of their life cycle. As an organization, it’s an opportunity where the board either consciously or subconsciously is asking the question what comes next, which is a logical on-ramp for, you know, option A, which is hire someone to replace the key leader or option B, “Are we ready to explore a partnership or a collaboration with another organization?” So I think that’s a logical on-ramp. It does require a little bit of delicacy in conversation with the founder who’s stepping away as do all founder-related situations.

Steven: Yeah. I think the delicacy was the crux of that person’s questions. So the person who asked that question, I would encourage you to reach out to Greg there by email because I bet he’s got some good insights there.

Greg: I can offer insights and advice. I told you I led two different nonprofits, Steven. Both times I took over for the founder of the organization.

Steven: Oh, wow, I didn’t know that.

Greg: Yes. I can talk a lot about founders.

Steven: That’s fun. Good for you.

Greg: It is. It has its own set of challenges like everything else.

Steven: You sure can pick them, can’t you?

Greg: I can. Yes.

Steven: I love it. Well, geez, it’s almost two o’clock. I know there’s a couple questions we didn’t get to, but would you mind taking more questions by email? Is that okay?

Greg: I would be happy to. Folks can reach out to me by email, also on social media, Facebook, LinkedIn, Twitter, and my phone number is on the slide as well. So happy to continue connecting with folks after the webinar.

Steven: I love it. This is a good one. Thanks for doing this, Greg. This is fun.

Greg: My pleasure. Thank you, Steven. Thank you to the team at Bloomerang.

Steven: Oh, yeah, this is a good way to wrap it up. You guests, you make my life so easy because you all come on and just, you know, give great advice. I learn so much every single session. So I enjoy it I think as much as the attendees. But speaking of attendees, thanks for listening. I know it’s a busy time of year. Got year-end coming up. I mean, we’re in year-end. I mean, we’re basically in it. So I love seeing a full room. So I really appreciate that.

And I’m going to grab my slides back here. I just want to show folks our next webinar 2021. I can’t believe it. But we’re going to take the next couple of weeks off, but we’re going to come back real strong in 2021. We got some really cool sessions, and we’re going to be really intentional with our first session. We’re going to talk about maintaining an anti-racist approach to your fundraising efforts. I know, Greg, you’re passionate about that. You’ve done so much great work with the Urban League, and it’s going to be a good one. So join us. I know it seems like a little far away, but the first . . . I think that’s the first full Thursday in January. We’re going to be back on our schedule. In our webinar page, we got a lot of sessions scheduled out into next year, lots of cool topics. So check that out, and hopefully, you’ll find something that is really kind of a pressing need that you can get some help with.

So we’ll call it a day there. Have a great year-end. You know, I don’t think people outside the sector understand all the work that you all are doing here. If you’re celebrating Hanukkah, I hope you’re having a meaningful week. If you’re celebrating the upcoming holidays, Christmas, New Year’s, I hope it’s a great time for you. I hope you get some rest and come back into the New Year real strong. Stay healthy. We will talk to you again next year. Bye now.

Kristen Hay
Kristen Hay
Kristen Hay

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