Successful Mergers: From the Proposal to 'I Do'

Internal and external circumstances are increasingly pushing many nonprofit organizations toward pursuing mergers.

By lightly comparing mergers with marriages, this column outlines steps to assess whether a merger is right for your organization. It also offers suggestions for managing the transition at each stage of the union: before the proposal, during the proposal, while designing the prenuptial agreement, when planning for the marriage, and during the ceremony.

The “go-live” date for a well-planned merger should mean a seamless flip of the switch, offering time for celebration and a well-deserved vacation. It’s an exhausting endeavor, particularly in the beginning stages, but strong collaboration and planning will result in a smooth transition and future success and harmony.

Before the Proposal

A merger is when two or more or­ganizations blend legally. But organizations also have less dramatic options they may want to consider. The most common arrangements include:

• Leveraging Complementary Expertise. This arrangement allows organizations to share or swap expertise. Just a few examples include a comprehensive outpatient clinic that may contract with a group practice with sexual offender treatment expertise; adoption agencies that serve neighboring regions may agree to collaborate when it benefits specific children and families; or a small therapeutic foster care provider may purchase billing services from a larger organization. The examples are unlimited, but the key feature is a contractual arrangement that allows two or more organizations to share certain resources.
   
• Joint Ventures. When two or more organizations join forces in order to act on certain opportunities as a cohesive group, it can be considered a joint venture. Examples include three agencies joining together to pursue grant funds to serve homeless children; a consortium of small agencies jointly purchasing an information system, or several diverse agencies jointly owning a building that houses each of their offices and a shared family resource center. Sometimes a contract is all that is necessary; other times the organizations may form a separate, shared legal entity.
   
• Mergers. Mergers involve two or more organizations forming a single, formal legal entity dedicated to a unified purpose. The specific reasons for merger can vary: several similar agencies may want to expand their capacity or geographic region; a large agency may look to absorb a small agency; or a fiscally strong organization could take over another in financial trouble. At times mergers are mandated or strongly encouraged by statute or state divisions.

Questions to Consider. When pursuing any option, organizational leaders need to ask questions about why they want to join forces. It is easy to assume mergers create efficiencies and cost reductions, but that is not always true. Avoid surprises down the road by answering these questions upfront:

• Why do you want to merge?
• What advantages do you anticipate?
• Do actual and projected data support those advantages?
• What barriers do you foresee?
• What are your concrete plans for overcoming or bypassing those barriers?

Also consider “softer” questions, for these issues will derail a merger faster than any logistical consideration:

• Do we trust our potential partner(s)?
• Do we share mutual respect and a similar spirit of collaboration?
• Do our visions and missions align, and do we trust that the other organization(s) practice what they preach?
• Are we each willing to let go of whatever’s necessary to forge a new merged identify?

The Proposal

Who’s In Charge? Certain practical decisions should be made upfront:

• Which organization will be the surviving legal entity?
• What happens to the other organization(s) legally?
• Who will serve as the new CEO?
• What will happen to the CEO and leadership from the other organization(s)?

This may sound backward, making leadership choices before more mission-critical decisions. However, a successful merger requires strong, consistent leadership, and that is most easily offered when leaders know their own individual futures.

Similarly, the board of directors should begin to deliberate upon new board composition. While this task doesn’t necessarily have to precede a merger commitment, it should begin sooner rather than later.

Statutes, Rules, and Regulations. It is best to both do your homework and consult with an attorney and/or accountant on all relevant statutes, rules, and regulations governing joint affiliations or mergers before making a commitment. Public entities are often required to merge, reconfigure, or dissolve at precise times of year. Some nonprofit organizations may be bound by other rules or regulations, all of which should be considered upfront.

Prenuptial Agreements

Intent to Merge. Once the entities choose to pursue merger they should execute an “intent to merge” agreement, preferably prepared by their attorneys. While these can be simple, they should include provisions regarding:

• an intention to explore merger;
• “hold harmless” or “good faith” provisions about sharing information throughout the process;
• confidentiality statements;
• provisions in the event that one, both, or all parties decide against merger; and
• agreements about how any costs related to the merger exploration will be paid.

Decision-Making Structure. The merger effort also needs a small steering team comprised of key leaders from each organization who have decision-making authority. This group will tackle the difficult and thorny issues along the way, so it is imperative they can make on-the-spot decisions, have excellent teamwork skills, and have mature qualities of trust and integrity. Frankly, a good sense of humor and freedom from taking things personally also helps.

This team must commit to meeting as frequently as necessary throughout the merger process, typically at least every two weeks at key transition times.

Due Diligence. Once the organizations have set their intentions, a more formal due diligence should occur. While due diligence is technically a legal term—and you will want your attorneys involved—it is best if executive leadership guides this process.

The point is to gather and share all relevant information so each organization can make sound decisions. Typical information includes:

• legal and organizational structure, including board of directors bylaws and composition, as well as subsidiary information;
• financial data, such as assets, liabilities, audits, revenue history, current financials, reserves, and real estate holdings;
• current budget information that details revenue, revenue sources, and expenses;
• service data that shows volume, capacity, and utilization;
• contracts and agreements documentation, including any pertaining to revenues and expenditures, contracted personnel, service delivery agreements, and lease agreements;
• human resource data, such as organizational charts, salary and benefits data, policies regarding vacation or sick time, and information about staff longevity and length of service;
• retiree benefits and obligations; and
• lawsuits, including any that are pending and those with active obligations.

Planning the Union and Making the Vows

Once the commitment is made and the merger “go live” date is set, the steering team must guide merger planning and implementation. It’s best to conceptualize this in three sets of tasks.

Managing Endings. One or all of the premerger organizations are essentially closing business, which requires certain operational and legal activities, particularly changes to personnel, finance structure, and day-to-day operations.

Creating the New Organization. At the same time, you are creating a new organization and need to handle everything from the legal framework to personnel, services, client transitions, organizational structure, and operations. The steering team becomes key project managers, guiding staff from all partner agencies to work together to create and implement new policies, procedures, and practices.

Managing Transitions. By consciously and deliberately managing the transition from “old” to “new,” you will ensure a smoother change. Activities include concise decision making, clear timelines, concrete action plans, and tremendous amounts of communication, both internally and externally.

Glitches and stumbling blocks are inevitable, but they can be minimized when a strong steering team effectively manages the transition, particularly when the team is honest, transparent, and unwavering.
 

Jeanne Supin is president of Watauga Consulting, an independent consulting firm located in Boone, N.C. She has worked with nonprofit and public human service and behavioral health agencies for 20 years, as both an employee and external consultant. 

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