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Non-profit Companies and M&A

How could mergers help non-profits prosper?

30Jun

The economic downturn in 2008 prompted a number of commentators to predict a flurry of mergers in the nonprofit sector, as occurred among for-profit organizations. Government cutbacks and a fall in the amount being given by private donors meant nonprofits were working with even fewer resources than before, with which they were having to help an increasingly large group of vulnerable people who had been hit by the crash. Despite this, the number of mergers has remained flat, and in fact there are now even more nonprofits than before, throwing more small and inefficient organizations into competition for scarce funding. Evidence also suggests that any recovery there has been tends to disproportionately benefit larger nonprofits at the expense of smaller organizations.

The motivation behind M&A for nonprofits is different to those for profit driven organizations, as there are no financial incentives on offer. Often it comes down to a case of simple survival, with mergers a last resort for those facing insolvency. Many nonprofits have shared objectives - even if their means of achieving them may differ - which means competition for funding can seem pointless anyway.

One of the main issues slowing down mergers in the sector appears to have been a lack of knowledge among leaders in the not-for-profit sector as to the benefits of a merger. Although, in a Bridgespan Group poll of nonprofit executive directors, 20% of 117 respondents said that mergers could play a role in how they respond to the economic downturn.

There has also been a lack of funding, with the costs associated with a merger for diligence and integration insurmountable for some organizations, particularly those looking to provide as much funding directly to their causes as possible rather than funnelling it into administration costs.

There are, however, a number of strategic advantages to merging that non-profits should be aware of, many of which are likely to save costs in the long term.

The main benefit to non-profits of merging is the consolidation of limited resources, most specifically staff - combining the expenses of duplicated service provider infrastructures, as opposed to the actual service itself. For example, should a town have two homeless shelters? The fact that there are 60 beds being provided is not the reason for a merger as combining the two shelters will still result in 60 beds being provided. The major difference comes about because the infrastructure is duplicated in both organizations, and the talent could be used elsewhere or terminated.

There is also the opportunity to enhance services provided to the community through sharing knowledge and specializing on the skill set that each party has proven best at. By pooling assets, there is also an increase in the economies of scale.

Mergers are not right for every nonprofit. It is important to have the right partner going forward, one whose thinking sits in line with your strategic vision, but should the right party arise there is often much to be gained.

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