There are an estimated 160,000 non-profit organizations in Canada, of which 86,000 are registered charities. Information recently released by the Canada Revenue Agency shows that charities alone made $223 billion in revenue and held assets worth $320 billion in 2012.The numbers show that the sector is large – but it is fragmented. Increasingly, non-profit organizations are subject to stricter regulation, more complicated tax rules, and unforgiving public scrutiny. Considering the highly discretionary nature of non-profit organizations' sources of revenue and the industry's competitive landscape, mergers in the non-profit sector can be valuable in furthering the goals of many organizations.
Andrea Cohen Barrack, CEO of the Ontario Trillium Foundation (OTF), recently presented a lecture on the topic of M&A for non-profits and charities.Two points stood out from her presentation because of the peculiar ways they apply to non-profit, as opposed to for-profit, organizations. First, non-profits must think critically about the strategic and community benefit of the merged organization.Second, non-profits must obtain the resources required for non-profit M&As from unconventional sources.
The continuation of the non-profit organization
In the contemplation and planning stages of a merger, organizations must think critically about whether a merger is an appropriate solution. The question of whether to merge often stems from financial considerations: budget cuts, government funding pressure, and the prospect of consolidating donors. Non-profits regard these factors and concerns over financial sustainability as the primary reasons for a merger. Drawing from her experiences, Ms. Barrack advised that, in fact, the most important consideration is the strategic and community benefit of the merged organization. A non-profit must ask if there is continued public support of the cause and whether the cause is still relevant. Though controversial, asking such questions will reveal whether the organization should continue to exist as a merged entity or whether the organization, and the cause that it supports, has reached its natural conclusion.
Funding a non-profit M&A
A merger of non-profits needs to be well resourced. Non-profits operating on lean budgets may not have reserves for large scale projects such as an M&A; most non-profits have, at best, three months of liquidity. They will need to seek out external funding to pay for M&A transaction costs, such as legal fees or employee severances. The organizations will also need to think about the non-financial resources required to transition to a merged entity. For a non-profit, funding for M&A activities will most likely come from governmental bodies, non-profit merger funds, or private donors. Organizations such as the OTF, an agency of the Ontario government and Canada's largest grant-maker, play a part by providing one-time injections of funding for non-profit M&As. Private funders such as the Sea Change-Lodestar Fund for Nonprofit Collaboration and the Catalyst Fund are also beginning to pop up. They can provide grants and non-financial resources to help facilitate a non-profit merger.
Collaborations and partnerships are common among non-profits and charities; a merger, however, is the ultimate form of collaboration. Non-profits considering this tool must look at the merger in a slightly different way than for-profit organizations. Nevertheless, mergers in the non-profit and charity sector have the potential to help organizations out of financial distress and can be an effective growth strategy for many organizations.
The author would like to thank Denise Gan, articling student, for her assistance in preparing this legal update.
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