Legal Considerations for Nonprofit
M&A
Increasingly, nonprofits are considering merging with or acquiring
a complementary organization. These types of transactions in which
an organization acquires the equity or assets of another are
generically referred as "M&A."
Through M&A, nonprofits are often more capable of overcoming existing challenges, such as staffing, cash flow, donor outreach, grantmaking, and more. However, key considerations as well as rules and regulations specific to nonprofit M&As should be understood to ensure a smooth transaction. This "Legal Considerations for Nonprofit M&A" series will help staff, board members, financial institutions, professional advisors, and other key nonprofit players understand legal matters concerning this type of transaction.
Part One: Why Consider a Nonprofit M&A?
Non- and for-profit organizations engage in mergers, acquisitions, and similar transactions for many reasons – some of which are the same for both classes. However, in many cases nonprofits consider M&A in response to unique issues impacting the fulfillment of their mission. This article addresses some of the common reasons for a nonprofit M&A.
Economies of Scale
Nonprofits may be able to better serve their missions by combining with other organizations conducting similar operations, in order to achieve greater economies of scale. For example, when two nonprofits merge, overhead costs like administrative support, information technology systems, and insurance policies, can either be combined or eliminate redundancies, resulting in cost reductions.
Combinations between nonprofit organizations with similar missions and markets can allow improvements in efficiency and output, freeing up more resources for programmatic goals. Additionally, when nonprofits align together, they can take advantage of the collective knowledge and experience of their leadership. They can increase stature in the community while reducing competition for funding.
Mission Expansion
Nonprofits can use M&A to further and even expand their missions. A nonprofit may wish to respond to its evolving community or identify an outgrowth of its existing mission. For example, a senior living facility that identifies gaps in services for other underserved populations in its community may seek to strategically expand care by acquiring the operations of an early childhood center or care facility for adults with disabilities. This strategic acquisition would further the organization's strategic goals to provide care within the community to those in need, while also strengthening the care provided for its current residents.
Likewise, nonprofits can utilize M&A strategies to find creative ways to expand their missions. For example, a nonprofit serving adults with disabilities could consider acquiring a for-profit entity to employ or train members of its organization. While its original mission was to serve adults with disabilities, now that mission has expanded to employing these individuals. Thus, M&A can be a valuable tool for nonprofits as they seek to expand to adapt to a changing world and/or reenergize their missions.
Maximizing Program Potential and Geographical Reach
M&A can be used to increase the programmatic and geographic reach of a nonprofit. Nonprofits that provide similar services or have related missions but operate in different regions may benefit from combining or affiliating to reach a wider swath of the population (while in many cases also achieving greater economies of scale as discussed above). Likewise, nonprofits with similar missions and geographic bounds could benefit from combining so their clients can more easily access both services while also mutually benefitting from sharing resources.
Financial Distress
A nonprofit experiencing financial stress may benefit from exploring M&A as a means to ensure the advancement of its mission or preservation of successful programs. For example, an organization that handles multiple programs, only some of which are financially viable, may sell those programs to another organization. Likewise, a nonprofit that is thriving may benefit from acquiring and stabilizing a struggling organization. Through this acquisition, the thriving organization can purchase successful standalone programs that lack financial backing, or gain underutilized, but strategically important, assets from a struggling organization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
